One of the most challenging aspects of financial planning for many people is transferring their hard-earned wealth to their heirs successfully. It’s extremely frustrating for people who have done a great job of saving their money and managing it well over a period of decades to pass it to heirs who mismanage their inheritance.
The key to keeping your wealth intact for future generations is to prepare your heirs for wealth transfer. Here are three strategies for doing that.
1. Begin teaching your children about the value of money early
The first step in educating your children about financial stewardship is to discuss money, and its value, openly. It’s an unfortunate fact that many American families actively avoid discussing money with one another.
BankRate’s recent Financial Taboos Survey found that only 38 percent of U.S. adults feel comfortable discussing their bank-account balances with family and close friends. Older generations are more reluctant to talk about money than younger generations.
Most of us didn’t learn about financial management from our parents or in school. This is changing, thankfully. According to the Council for Economic Education’s 2024 Survey of the States, 35 states now require high school students to take a course in personal finance to graduate, up by 12 since 2022. Of those, 15 states require a semester-long course on personal finance. I believe this is a significantly positive trend that will help future generations be much more money-savvy than previous generations.
Still, I believe it is parents’ responsibility to teach children the value of money. There are many benefits to teaching your children how to manage money when they are young. Your instruction and guidance will encourage them to begin saving money early, which will enable them to benefit from compounding interest. Their money will grow over time, providing them a solid foundation for their financial future. Also, children who learn financial stewardship and independence are less likely to need their parents’ help buying a home when they get older.
Early and consistent guidance will also set them up for success if you name them as the heirs to your own wealth. It’s just not realistic to expect that young people who have never learned the value of money, or how to manage it, will suddenly become great stewards of an inheritance.
Consider giving your children an allowance, with the expectation that they will save part of it for the future, donate part of it to a cause they care about and spend a little of it. Teach them the importance of delayed gratification. Show them how costly it can be to make purchases with high-interest credit cards and carry the balance for a long period of time. Involve them in discussions about the family finances, and encourage them to ask questions.
As they get older, let them weigh in on decisions, such as those relating to family vacations and major purchases. Help them get comfortable discussing the pros and cons of various options. And let them make mistakes! We tend to learn more from our mistakes than from our successes.
As you are teaching your children how to manage money, also teach them how to keep money from interfering with the quality of their relationships. This is an important lesson that can benefit everyone.
2. Have an updated will, and name beneficiaries on all accounts
Make sure you have the standard asset-planning documents in place: a will, powers of attorney (financial and health care) and beneficiary designations. Having all these documents completed and up-to-date can help you manage assets and health-care decisions and make sure your wishes are followed after your death.
A legally executed will is one of the most common and effective wealth-transfer strategies. In your will, you will document in detail who will receive each of your assets; however, it will not take effect until you pass away. Your executor will make sure your wishes are carried out, which includes upholding your interests in probate court, if required. Be sure to list in your will any investments that don’t have a provision for a beneficiary.
Make sure your beneficiaries match on all your retirement accounts, life insurance contracts and other assets. Discrepancies can cause delays and complications. When you go through major life changes, make sure you update your beneficiaries on all your accounts.
Not having a will at all (dying intestate) can cause your heirs to go through the long, often frustrating probate process. That can eat away a lot of the assets you leave to your beneficiaries — even if they are good stewards. We want to make sure you are well-prepared so you and your family can avoid going through probate.
3. Set up a trust that specifies how your money will be distributed
As we all know, some people are savers by nature, and others are spenders. So, even with ample training, some heirs are just destined to be poor managers of money, unfortunately.
Thankfully, there are ways for you to set some parameters on how and when heirs will receive your money. You can place your assets in a trust, designate a trustee to manage it and set up specific guidelines for distribution of those assets.
A trust is a legal document, drafted by an attorney, that names a trustee who will make sure your assets are managed the way you wish, both during your lifetime and after your death. There are several types of trusts:
- If you are worried that some of your heirs will not manage their inheritance well, you might want to set up a spendthrift trust. This type of trust limits your beneficiaries’ access to the assets you leave to them. Instead of receiving their inheritance all at once, the funds are released incrementally. For example, you could arrange to disperse any dividends earned on a quarterly basis. This helps protect your assets from dwindling away as the result of a beneficiary’s bad spending habits. Also, creditors cannot come after any inheritance that’s being held in the trust. The trustee you assign will be responsible for dispersing funds to your beneficiaries according to the specifications you made.
- You might also want to set up a lifetime asset-protection trust (LAPT). Also known as a lifetime trust, it’s designed to protect a beneficiary’s inheritance from creditors, lawsuits, and financial risks related to illness, accidents, divorce and debt. Because the assets belong to the trust and not the beneficiaries themselves, the beneficiaries are well-protected from creditors, bankruptcy and even future ex-spouses.
- Arevocable or living trust allows you to control of your assets while you’re alive. On the plus side, a living trust allows assets to transition directly to your heirs, so they do not have to go through probate. However, on the minus side, your heirs will likely have to pay estate taxes on their inheritance.
- With an irrevocable trust, you cannot change or revoke the trust after you establish it, except under very limited circumstances and with the consent of your named beneficiaries. In essence, this type of trust removes assets from your estate. The good news, though, is that assets held in an irrevocable trust are shielded from creditors and potential lawsuits against you, the grantor. Also, there are potential tax advantages with an irrevocable trust, such as reducing estate taxes.
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How prepared are you to transition your hard-earned money to the next generation?
Please call us if you need help in this area. We routinely work with estate-planning attorneys, CPAs and other professionals as a team to make sure you preserve as much of your wealth as possible — both during your lifetime and beyond.
