Want Your Loved Ones to Squander Their Inheritance? Do This.
When you think of think of what life will be like for your family when you are gone, what do you picture?
Do you imagine a fulfilling life of success?
Do you imagine your family taking the wealth you leave them and combining that with the lessons you’ve taught them to continue a great family legacy?
Do you imagine happiness, wealth, and great relationships?
Do you imagine your family squandering everything you’ve given them and actually ending up worse off than when you were here?
I’m going to go out on a limb and guess you aren’t hoping for that last situation, but it’s happening to over 35% of all Americans.
Why 35% of Americans Squander their Inheritance
Before I get there, I want to point out that I’m not making this up. This isn’t some estate planning lawyer mumbo-jumbo. It’s science.
Ohio State University’s Jay Zagorsky did a study of cross-generational wealth transfer and his findings were very disheartening.
He found that even when big bequests above $100,000 are at stake, all the money disappears 18% of the time. ALL of the money disappears.
And when you are talking about smaller distributions, say the $1,000 figure that is typical for middle-class grandkids and great-grandkids, and it’s likely that money will be gone in a matter of months and not years, often just rolled into the person’s household budget.
So it’s happening, but why?
Why are 35% of Americans squandering their inheritance?
It’s being given away recklessly.
That’s right. I said it. If your family squanders what you give them, it’s your fault!
Lump Sum Inheritance Payments Equal Squandered Legacy
Here’s one thing we know about ourselves: we are not good at managing money.
And specifically, we are not good at managing large sums of money that are just given to us.
That’s why you see lottery winners receive millions and squander it all away in a few years.
There are several factors at play when it comes to this phenomenon – and that’s a topic for another blog post.
Right now I want to give you a few strategies for extending the life of the money you give away (pun intended) so that it affects your family and your kids in the way you imagine it should.
Want to Create Legacy? Spread Out Your Distributions
The fact is, lump sum distributions are the cause of this problem. They are the reason 35% of all inheritances get cashed out within two years.
To prevent a cash out situation, eliminate the ability to cash out.
Option 1: Pool and Distribute
Thinking of giving away twenty $1000 gifts? Instead of doing that and seeing the money disappear into the ether, consider pooling those gifts into a trust that lasts a lifetime.
Put that $20,000 into a trust that distributes $100 a year to your beneficiaries and there’s a chance the money will be reinvested, used for beneficial purposes, or at least not squandered away.
And, when assets are pooled in this way there is a much higher likelihood that that trust assets will continue to grow, making these gifts last forever (read: everyone gets WAY more than the $1000 they would have received over time).
Create a Special Purpose Trust
I talked about this last week when I outlined 5 ways to keep your kids from blowing their inheritance, but a special purpose trust is a great way to make your gifts really count.
A special purpose trust is pretty straightforward: you decide what the money can be used for. If your people decide to pursue those things (college, a mortgage, a kid) then they get to use the money you’ve earmarked for those purposes.
If they want to buy a new motorcycle or head to Vegas for one killer weekend, they are out of luck.
This, by the way, is also a great way to keep your voice alive long after you’ve passed on.
The bottom line is that unless you think about the way your money and your message are going to be distributed and take the time to set that up, your setting the next generations of your family up for failure.
We all deserve to have our family legacy continue on in the way we always imagined. Eliminating lump sum inheritance payments goes a long way toward realizing that goal.
P.S. Do you have kids? Have you completed guardianship paperwork? Have you done it correctly? Click here to find out what happens if you don’t do anything: Are you okay with a judge choosing the guardians of your children?
P.P.S. Do you own a business? Do you have a plan so the business, and your family, can survive if something happens to you? If not, click here to learn how simple it is to protect your business and your family from tragedy: 5 Ways to Protect Your Business from Catastrophic Failure.
P.P.P.S. Do you have no kids and think you don’t need an estate plan? Single and think a will is only for married couples. You couldn’t be more wrong. Click here to learn more: 5 reasons estate planning is a must have even if you don’t have kids.
Christopher Small is a Kirkland estate planning attorney who helps people get rich and live forever. He is also the owner of CMS Law Firm LLC.