Preparing your kids for an inheritance is not an easy mission.
You may be worried about how much to share, when to share, how to bring up the conversation, whether you want to use trusts to maintain control, whether to leave an inheritance equally among family, and worry about creating spoiled kids.
Are you setting your kids up for success when you die? Or are you kicking the can down the road ignoring important conversations?
Perhaps, you are somewhere in between and feel you could be doing a better job.
We’ll dive into why an inheritance can be a problem, how to prepare your kids for an inheritance, and how to let go of some of your worries.
Why An Inheritance Can Be a Problem
The biggest issue I see with an inheritance is beneficiaries not being prepared.
Your adult children may know that you are financially comfortable, but knowing that in theory and seeing that amount of money in their financial accounts after you die are very different things.
Someone can tell you what having $2,000,000 feels like, but until you have it in your account, you’ll never know the security, freedom, and flexibility it provides.
It’s similar to how I can describe what a passion fruit tastes like, but until you bite into one yourself, you’ll never really know.
As a society, we often dance around money. Hush hush. Let’s not talk about it.
That’s not helping anyone.
You likely had a lifetime to accumulate money and your options in life changed slowly as you realized what money could do for you.
Your adult kid is unlikely to have that experience. They are going to go from limited options to seemingly endless options overnight. Sudden money can be hard to handle.
That’s not even getting into the emotional complexities of having money because you died. There can be guilt associated with that money or a desire to not think about it.
While an inheritance can be a gift, it’s often tangled up with difficult feelings and a process to figure out what comes next.
The question then becomes, “What can I do to prepare my kids for an inheritance?”
Hold Family Meetings
Let’s normalize family meetings to discuss money.
Break the stigma associated with talking about money. How are your kids supposed to learn about your values, what you prioritized, what you gave up, how you invested, and other money habits if you never directly talk about it?
Yes, even if your kid is in their 30s, 40s, or 50s, you can still talk about it. There is something to be learned.
You don’t have to directly tell your kids how much money you have, but I don’t think that is a bad idea in most situations. You could talk about charitable giving. You could discuss the following:
- How much you give
- How you decided how much to give
- What charities you support
- Why you support those charities
- What tax planning you do around your charitable giving
Charitable giving is often a good place to start because it’s easy to incorporate more people. You can ask for their opinion about where to give and how to distribute it among different charities.
After that starts to feel more comfortable, you can talk about any of the topics below:
- What percentage of your income you aimed to save
- How you decided which account to save into
- How your savings changed over time
- How your emergency fund changed over time
- How you invested your money
- When you first created an estate plan, when you changed it, and how you made decisions within it
- How you approached tax planning
- How you made spending decisions
- How you saved for big ticket items
- Anything else related to money
If you feel you didn’t do things well, tell them how you did it and what you wish you had done differently.
One of the biggest benefits of talking about money with your kids is them learning your money values. It doesn’t mean they have to accept those same values, but it does give them an option to learn, process, and think about how they fit into their own life.
When you are gone, it is unlikely that your kids remember your financial tips. It’s more likely that the values you instill will remain.
Gift Regularly
Another way to prepare your kids for an inheritance is to give money to them regularly, potentially up to the annual gift tax exclusion amount, and see how they handle it.
I’m a fan of this method because it’s a smaller amount each year as opposed to a big lump sum at the end of your life. You get the opportunity to see what they do with it.
Do they contribute to a retirement account? Do they save for a down payment? Do they put it in a 529 plan for your grandkids? Do they pay for daycare? Do they buy an expensive car? Do they take a trip?
It’s also a way for you to determine if they are not good at handling larger sums of money and if you need to put more guardrails on a future inheritance through a trust, which I’ll talk about in a later section.
Before you put any guardrails on a future inheritance, make gifts multiple times. The point of this exercise is to give them room to make mistakes! If you do it once and you “disapprove” with how they spend it, that is sometimes more a reflection of your own values and life than theirs.
If they are scraping by and never get to take a vacation, your gift may be their one opportunity to treat themselves. What feels like a waste to you may be one of the best life experiences they’ve had in a long time.
How they spend money doesn’t need to be how you would spend money.
The key is to make gifts regularly, see how they handle it, and continue those family conversations. Be curious. Ask questions about how they decided to use or spend it. Don’t make assumptions.
Keep thinking about the regular gifts as exercise or practice in a sport. You don’t show up on day one fit and being technically correct on every play. It takes regular practice and mistakes.
Let Go of Control
If you’ve incorporated money lessons with your kids growing up and hold regular family meetings, there isn’t much more you can do. It’s time to let go of control.
As you make those gifts, let them make decisions. You can be there as a sounding board and to be available if they ask for help or for your opinion, but it’s not the time to try to influence them if they don’t ask.
Like cooking, if you never let them in the kitchen to actually prepare the meal, they are never going to learn. If you are hovering over their shoulder and showing them what to do, they never get the experience of preparing their ingredients, pre-heating a pan, controlling the heat, knowing when to add ingredients, and when the dish is done.
Watching and doing are very different.
It’s much better for them to have full control over a smaller amount of money, make mistakes at a smaller scale, and learn lessons than it is for them to inherit a large sum of money and make mistakes at a gigantic scale.
For example, if they make a foolish investment decision with $10,000 and lose half, that’s a $5,000 lesson. If they inherit $1,000,000 and lose half, that’s a $500,000 lesson.
It’s easy to recover from a $5,000 lesson. It’s very hard to recover from a $500,000 lesson. Those lessons get seared into you as a human being and make it hard to want to invest again — even if it’s in a prudent way.
You want to prevent your kids from making mistakes. It’s natural.
But, be wary of trying to prevent $5,000 mistakes if it means they never learn how to do it for themselves because then you are setting them up to make $500,000 mistakes later.
Good money decisions are like any other skill. They need to be practiced and learned. People don’t show up as a professional chef on day one. They have the opportunity to burn dishes, under salt a meal, and cut themselves in the kitchen.
Prepare Their Marriage
If your inheritance is going into a trust that only benefits your kid and not their spouse, you should make it known and prepare their marriage for it.
This often causes conflict in a marriage because it creates unequal resources and uncertainty in their financial planning.
For example, if they want to retire and spend a certain amount, their financial plan is going to look very different if your kid dies before their spouse. If you pass away and your kids inherited $2M within a trust for only their benefit, that creates a certain lifestyle and spending ability, but if they become accustomed to that level and your kid dies and that $2M goes to the next generation, the surviving spouse may be left with far less and need to significantly adjust their life.
These arrangements, although well intentioned, often create stress, tension, and sometimes animosity in a relationship. It’s money that’s available, but it’s not money that can be counted on.
That means couples often have to over save in their own accounts or spend far less because they can’t count on the trust being available for the longer of their two lives.
Imagine building a life financially with someone for decades and then suddenly one spouse has access to significant resources that only benefits them. That can create awkward relationship dynamics.
It’s a strange feeling to have access to significant resources, but knowing those resources can disappear at any time.
I’d think carefully about how you structure any inheritance, who it benefits, and how it might influence your kids’ relationships. There are ways to structure an inheritance that benefits both of them while still passing to the next generation when they both pass away.
Creating Spoiled Kids
People are often fearful of creating spoiled kids with an inheritance.
Guess what?
You already raised them. You had the opportunity to instill your values. You still can with family meetings and regular conversations, but at the end of the day, they are going to be who they will be.
I like Morgan Housel’s approach, “One generation worries about how to get food and shelter. The next doesn’t have to worry about food and shelter but frets about security. The next has security but worries about disease. The next tackles disease but worries about education. The next gets education but worries about work-life balance.”
As you work hard and leave money for your kids, they are fortunate enough to spend their days in different ways. Perhaps they get to study and create art as opposed to grinding at a job they don’t love, but pays good money.
Wasn’t the point to work hard and create better opportunities for your kids? Wasn’t it so they could live a different life than the one you had? One with more options, flexibility, and less worry about covering basic necessities?
If you are worried about creating spoiled kids, maybe it’s time to reframe what opportunities you are giving your kids through an inheritance. Maybe they get to spend their life contributing to society in a different way and solving new problems.
Keeping Control through Trusts
If you really want to control your money from the grave, you can through the use of trusts.
There are good reasons to use trusts: preventing people with addictions from accessing large sums of money, controlling the timing of distributions for people with spending problems or who are young, creditor protection, reducing estate taxes, and divorce protection.
They can often be overused because people feel like they need a trust without really understanding what it is, how it works, and the ongoing tax reporting requirements.
If you have a young child or a child with spending problems, creating a trust at your death for their benefit can be a prudent thing to do. You can assign a trustee to manage the trust, follow the terms of the trust, make distributions according to the rules of the trust, and more. It can be set up to benefit a child without the child having control over the principal of the trust.
In my experience, trusts for an inheritance are best used for people with addiction or spending problems, young children, or significant wealth (tens of millions) where estate taxes and generational wealth planning become more important.
Sometimes it can make sense outside of those scenarios, but these types of trusts come with more ongoing requirements, such as an annual tax filing, needing to find a responsible trustee or hiring one, annual or more frequent distributions, and depending on what is in the trust, potentially managing different types of properties or investments.
A trust introduces more complexity and costs, which means it needs to be weighed against the importance of keeping control after your death.
This is where it’s important to speak with a qualified attorney, accountant, and potentially a financial planner to fully understand what you are creating and how it benefits your family.
Final Thoughts – My Question for You
Preparing your kids for an inheritance is a good problem to face.
You want to get it right.
You may be worried about how the money might change them, how much control to exercise over it, and how it might impact their relationships.
The key is to start small. Let them practice through making regular gifts, talk regularly, and consider holding family meetings.
It’s a work in progress for every family.
I’ll leave you with one question to act on.
How will you prepare your kids for an inheritance?
