5 Estate Planning Tips to Support Your Kids Without Spoiling Them
If you’re like many of our clients, you’ve worked hard to excel in your career, pay off debts and live within your means, all in an effort to build a solid financial future for your family. And while you may hope to pass along a financial legacy to support future generations of family members, you may also worry leaving too many assets could spoil your children or make them less likely to pursue their own success in life.
Following are five tips to help you pass along a generous financial legacy while also encouraging your kids to find their own success.
#1 – Tie your money to your values.
Have you ever noticed how the IRS incentivizes taxpayers for certain actions, such as investing in a home or opportunity zone, donating to charities, saving for retirement, avoiding short-term investment trades, etc.? A similar strategy can be used to incentivize your heirs to find their own success in life rather than rely on an inheritance.
Consider establishing a trust for your children with specific milestones that result in a payout. Ideally, these milestones will align with the values you hope to pass along to your loved ones — charitable giving, education, entrepreneurship, responsible financial management, etc. Examples include:
- Education milestones – If you value higher education, you could establish a pre-determined financial payout for graduating college, receiving an advanced degree, etc.
- Business startup – If you wish to incentivize your children’s entrepreneurial ambitions, you could authorize the distribution of seed money to start a new business.
- Income matching – If it’s important to you that your children learn to support themselves, you could match a percentage of their salaries to incentivize them to keep working. For example, say you authorize an annual distribution of up to 50% of your daughter’s salary. If she makes $100,000 in a year, she’d receive an additional $50,000.
- Chartable commitments – If charitable giving is an important family value, consider authorizing a matching donating to the charitable causes your children support.
- Smart financial decisions – To encourage smart financial decision-making, consider offering distributions for taking steps toward a more secure financial future. For example, meeting with an advisor, following a budget, establishing a financial plan, saving for retirement, saving for a child’s college education, etc.
#2 – Delay distributions.
If you have a revocable trust in place, you can specify how and when distributions become available. One particularly effective strategy to prevent heirs from overspending is to establish staggered distributions based on each child’s age.
For example, you may decide to split each child’s inheritance into four separate distributions, giving a quarter each at ages 25, 35, 45 and 55. If you have grandchildren whom you wish to support, you may decide to time a distribution around age 18 to help pay for their college expenses.
One of the main benefits of establishing a revocable trust is that you retain control of how, when and to whom distributions are made.
#3 – Teach your kids to be good financial stewards.
One of the best ways to help ensure your kids will be good stewards of your financial legacy is by teaching them about money from an early age. Regardless of your wealth, teach your kids about delayed gratification, budgeting and the satisfaction of a hard day’s work.
While your kids are living under your roof, consider giving them not only an allowance but also some financial responsibilities. Maybe they need to budget for back-to-school clothes or pay their own cell phone bill. Doing so gives them an opportunity to learn how to prioritize their financial decisions.
Once your children are out on their own, consider giving them financial gifts to see how they manage the assets. Ideally, they’ll make smart financial decisions, such as starting an investment account, using the money for a down payment on a home, starting a college fund for their own children, etc. On the other hand, if they make unwise financial decisions, you have a great opportunity to reiterate your financial values and share tips to help them better plan for the future.
#4 – Share what you did to build your wealth.
Many kids who were raised in a financially secure household don’t fully appreciate the sacrifices their parents made along the way to build their wealth. Being open and honest about your financial journey can help your kids gain an understanding of what it takes to achieve financial success.
Be open and honest about your struggles. Share details of the mistakes you made along the way. Tell your kids about the opportunities you’re particularly grateful for. Discuss the sacrifices you made to build the life you’ve been able to give them.
Not only will sharing your experience help your children learn from your successes and mistakes but it may also bring you closer together as a family.
#5 – Love your kids equally by treating them uniquely.
One common estate planning misconception is that assets should be divided equally between all children. In reality, each of your children likely has unique needs and challenges. A 50/50 (or 33/33/33, 25/25/25/25, etc.) distribution doesn’t make sense for every family.
For example, if you have one child who is a successful lawyer living a comfortable lifestyle and another child who has special needs and requires life-long care, it probably doesn’t make sense to divide your assets equally between the two. Similarly, if you have a child who struggles with drug or alcohol addiction, you may decide on a staggered distribution approach with special allocations permitted to cover the cost of rehab, etc.
One of the best ways to distribute assets according to each heir’s needs is by establishing a trust and specifically designating your wishes in the trust documents. It’s important to note that communication is the key to avoiding resentment should you decide to distribute assets differently to various heirs. Engage in open and honest conversations about your wishes and the reasons behind your decisions. Doing so can help all family members remain on the same page and lower the potential for future family conflict.
Could you use help implementing well-thought-out estate planning strategies to support your children? Creative Planning is here for you. Creative Planning Legal is one of the largest estate planning law firms in the country, with attorneys licensed to practice in a variety of states. Regardless of your specific situation, we can help prepare a custom estate plan to meet your needs.
