Creating a Strategy for Leaving Your Kids an Inheritance

You want to leave your money and property to your kids without ruining them. You don’t want them to lose their motivation. In order to do that, you need a strategy or a plan for accomplishing that.

The problem is that many professional advisors out there will prescribe a certain type of document or a certain action. Those are tactics. Tactics are devices or methods for accomplishing a goal.

Let’s use an analogy. If you want to build your dream house, you could go to subcontractors who would sell you on this type of window and that type of roof. Those are all tactics. But without a general contractor to implement a strategy, you could end up with a heap of building materials on your property with no one to assemble them. The general contractor needs a building plan (strategy). Within that building plan, you can swap out different windows, cabinets and flooring (tactics).

That being said, let me introduce some methods (tactics) for giving your kids an inheritance without ruining them. Then at the end, you will learn some strategies for implementing those tactics.

Tactic #1: Do a Stress Test. The annual gift exclusion amount for 2021 is $15,000. That means you can give away $15,000 to as many individuals—your kids, grandkids, their spouses—as you would like with no federal gift tax consequences. So, give this amount to your kids and see what they do with it. Do they go to the casino? Or do they invest it? Do they start a business? Or do they use it to go on a vacation? That will give you some idea of how well that child will handle a larger amount of money. But it does not solve your problem.

Tactic #2: Incentive Trust. Your revocable trust can include incentives that determine who gets how much and when. For example, the trust can say that if they go to school, the trust will pay. Your trust can also match the child’s income. So, if your child becomes a schoolteacher making $35,000 per year, the trust will match that and pay another $35,000. The theory is that at least your child will be productive this way. However, I’m not a huge fan of incentive trusts. Most people will live up to their lowest expectation. I knew the grandson of an old European aristocratic family. He sold used cars because that allowed him just enough to live comfortably. But I wouldn’t say he had much motivation to really make something of his life.

Tactic #3: Tie distributions to certain ages or events. You could, for example, say that your child gets 25% of their inheritance at age 25, and another 25% at age 35%. Or they get a portion when they graduate from college. This assumes that somehow along the way, they will have learned how to manage money. Not always a safe assumption. This may work for more modest inheritances. But if you’re dealing with many millions of dollars, a person could get by just enough on their incremental inheritances and then reach age 65 having spent everything. (Not a great outcome.)

Tactic #4: Get Your Kids Involved in the Family Foundation. If you have a charitable foundation, then that foundation needs to give away a certain percentage each year. You can give each of your kids the responsibility of picking a charity for a portion of what needs to be donated. That will help them learn about how different charities are operated, and learn about holding the charities accountable for how they use the money. However, this has little to do with motivating your kids to be productive with their lives.

Tactic #5: Give Cash Without Giving Cash. This involves making payments for the benefit of your kids, without giving cash outright. For instance, you can pay off their student loans. You could also buy a house for each child. The problem with this is it doesn’t teach them how to manage money. It assumes they are irresponsible and does not do anything to fix that.

Finally, Here Is How to Create Strategy. In order to raise healthy, resilient children who are prepared for a significant inheritance, you need a plan. There is no single strategy that will work for all families. However, a basic strategy could be this:

First, you do the best you can to raise your kids with good values. One value would include preserving the family’s money for the benefit of the family’s future.  (As opposed to teaching your kids that they are entitled to get whatever they want.)

Second, gradually get your children involved in family business. This might include inviting them to family council meetings or meetings with professional advisors. When they are old enough, they could become co-trustees over their portion of a trust.

Third, create a system for communication, management and decision-making that will continue even after you have passed away. For your family to continue to thrive, you need a way of managing the wealth that will survive you. One proven way of doing this is with what’s called a Family Office. (Our law firm offers Virtual Family Office services that will fulfil this function.) The Virtual Family Office can help coordinate with your professional advisors to pick and choose the best tactics for any given challenge.

Summary. Our law firm’s Virtual Family Office service is comparable to a general contractor for a building project. Without an overall strategy (building plans) and someone to implement that strategy (general contractor), you’re left with a bunch of tactics (windows, shingles, bricks) with no one to assemble them. Families that are successful over multiple generations make use of family office services to create and implement long-term strategies. Our Virtual Family Office service will help ensure that every element of your wealth is intimately interconnected to serve your best long-term interests.

ABOUT THE AUTHOR

Founding attorney Paul Deloughery has been an attorney since 1998, became a Certified Family Wealth Advisor. He is also the founder of Sudden Wealth Protection Law.

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