How to Pass Your Wealth to Your Children

Have you ever given any thought as to how you will pass your financial wealth to your children?  Responsible provisions can be built into your living trust to protect your children and their inheritance, no matter how modest or how abundant your wealth might be.  Keep in mind that most wealth in this country is lost between one or two generations because people simply don’t take the time to learn how to best pass on their wealth.  Even if you don’t have a great deal of wealth, why should your family lose what little it may have?

When creating an estate plan, most parents have to decide how and when their children should inherit from them.   In most cases, each child receives an equal share.  In some cases, distributions can be deferred to certain ages – for example, 1/3 at 25, 1/3 at 30 and the balance at 35.  Some parents also allow other distributions to their children in addition to age-based distributions.  For example, additional distributions can be made for a child’s health, education, or support of some kind.  These kinds of distributions are usually governed by the living trust – the main component of most estate plans.

Another common feature is to NOT distribute to your children.  In some living trusts, we will build in special language that allows the trustee to withhold distributions to a child, even when an age-based distribution comes due.  For example, if a child is a spendthrift and is unable to manage money, hanging out with the wrong crowd, etc., the trustee can withhold distributions.  In some cases, there may be looming trouble with creditors or perhaps a divorce on the horizon.   In some cases, distributions are made to kids who then file for divorce a few years later.  Guess who often takes half of that inheritance during the divorce?  That’s right – your ex-son-in-law or ex-daughter-in-law.   In some cases, children should not inherit if they have substance abuse problems such as alcoholism or other drug problem.  In those cases, we need to make sure we build in some reasonable trust provisions to offer guidance as to when distributions can be made to such a child.    Finally, in some cases, distributions to a child may not be prudent if that child has special needs (autism or other disability).

Some parents may wish to entertain the “pot” trust.  That means that each child does not get an equal share.  Instead, the inheritance is all put into one “pot” which is used by the Trustee depending on each child’s need.   One child may need more than another.  For example, one child might marry an independently wealthy spouse and have little need for an inheritance, while another child may be in more need of distributions.  Sometimes the “pot” approach is helpful when one child has already received a college education and it would not be fair to give them another distribution when other children may not be done with high school yet.  The pot trust is a helpful approach in some circumstances, and parents should consider it.

When working with your estate planning attorney on your living trust, make sure you spend some time designing “how” your children will inherit from you.  Will they get everything in one lump sum?  Is that a good idea?   Make sure your wishes are outlined in writing!