Parents can put several measures in place to ensure that their children properly handle wealth if it comes to them at a young age. These steps give you the peace of mind that your children won’t squander their inheritance prematurely.
Build incentives and flexibility into a trust
One such measure is creation of an incentive trust that rewards children for doing things that they might not otherwise consider. Such a trust can be an effective estate planning tool, but there’s a fine line between encouraging positive behavior and controlling your children’s life choices.
Incentives can be valuable if the trust is flexible enough to allow a child to chart his or her own course. A so-called “principle trust,” for example, gives the trustee discretion to make distributions based on certain guiding principles or values without limiting beneficiaries to narrowly defined goals.
Consider distribution amounts and timing
Many parents take an all-or-nothing approach when it comes to the timing and amounts of distributions to their children, either transferring substantial amounts of wealth all at once or making gifts that are too small to provide meaningful lessons.
Consider making distributions large enough so that your children have something significant to lose, but not so large that their entire inheritance is at risk. For example, if your child’s trust is worth $2 million, consider having the trust distribute $200,000 when your son or daughter turns 21. This amount is large enough to provide a meaningful test run of your child’s financial responsibility while safeguarding the bulk of the nest egg.
Make your legacy last
If you plan on leaving a sizable amount of your estate to your children, consider incentive trusts and scheduled distributions. Contact me at SDitman@berdonllp.com or your Berdon advisor to learn additional strategies that will help prepare your children for their inheritance.
Scott T. Ditman, a tax partner and Chair, Personal Wealth Services at Berdon LLP, New York Accountants, advises high net worth individuals and family/owner-managed business clients on building, preserving, and transferring wealth, estate and income tax issues, and succession and financial planning.