When Should Your Children Get Their Inheritance?

(Image credit: Alistair Ber)

One of my clients who was leaving $2 million to his three adult children had to decide when each of them would receive a portion — or all — of their inheritance.

The oldest one, in his mid-50s, received his full share immediately after his father passed away. However, the other two children were in their late 30s and were treated differently. Their inheritance was kept in a trust with one-third given to them at age 45; the next one-third at 50 and the remainder when they turned 55.

The father’s intention was to treat the two young heirs fairly — and protect them from spending their share unwisely. His instincts were on the money.

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Should You Treat Your Kids Equally in Your Will? 12 Financial Planners Weigh In

One of the children, a son, was not financially responsible, could not hold a job and had several failed marriages. He called regularly asking for money from his trust simply to pay his bills. Fortunately, he was able to keep a roof over his head and feed his children because of his father’s decision to distribute the funds over a long period instead of at his death.

The younger daughter, however, had a good job and saved money in a 401(k) retirement savings plan. She never needed to withdraw any money from her trust, only needing those funds to pay the accounting and tax fees to maintain the trust. So, when she reached ages 45, 50 and 55, she had plenty of money available to care for her family and enjoy life.

As the saying goes, “Love your children equally, but treat them uniquely.” That axiom is true with inheritance planning, too.

When a person is drawing up or revising their will, it’s common to consider how to structure their inheritance payments to children. If their nest egg has grown nicely over many years, the size of an inheritance only raises more questions about how to distribute it — all at once or in smaller portions over a period of time.

Given this backdrop, here are some inheritance strategies to consider:

Children up to age 12

Consider setting up either a lifetime trust or a trust that will last until they are in their mid- to late 40s. At this young age the person or entity you name as trustee to oversee the money is extremely important, because the young child is totally reliant upon an adult steering them in the right direction. It’s also too soon to tell whether your child will turn out to be financially astute or whether money will easily burn a hole in their pocket. A trust protects the child’s inheritance until they have a better understanding of how to manage money and manage themselves. A trust can also protect children against a failed marriage and help financially support them if they choose an occupation that may not pay well.

How to Choose the Right Trustee for Your Estate

Teenagers/Children Entering College

At this point, you can better understand a child’s maturity level and direction in life. It’s still a good idea to leave most, if not all, of a child’s inheritance in a trust until they are at least out of college, if not longer. This strategy provides a deterrent to excess spending, such as large parties and vacations with friends or expensive sports cars. And it can help derail any thoughts about leaving college and not graduating. At this age I would still consider setting up a lifetime trust, or one where it will remain in trust until their mid- to late 40s. The trust can provide periodic disbursements during the term of the child’s trust to start a new business, buy a house, supplement monthly income needs, etc.

College Graduate, But Can’t Yet Pay Their Own Way

See Recommendation No. 2.

Mature Young Adults, Especially Those with Families

At this point, the adult child has a strong sense of independence, is more financially stable and may even have their own financial or professional adviser. Consider giving the child some money outright, perhaps 25% to 50%, depending on the size of their potential inheritance. This could come in handy to help your child pay family expenses like private school tuition, put an addition on their house, or make it a little easier to make ends meet each month. However, the larger the inheritance, the longer I recommend that it is in a trust to protect against potential divorces, creditors or wasteful tendencies.

Once the Child Reaches Mid-Life, Give It Away, But Don’t Forget These Exceptions

As child turns 40 to 45 years old, giving them their full inheritance can be the better move. It’s a simplified estate plan, less costly to manage, and there may no longer be a need for the benefits of a trust that I’ve mentioned. There are always some exceptions, of course. For example, if your child works in a profession where they may be sued, such as a medical doctor, or if they have a choppy marriage, you may want to continue to keep some or all in a trust. Plus, you never know what can happen in the future, and money in trust could help be a protective barrier against unforeseen financial catastrophe.

How Codicils Can Simplify Updating Your Will as Life Evolves

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Lisa Brown, CFP®, CIMA®, is author of "Girl Talk, Money Talk, The Smart Girl's Guide to Money After College” and “Girl Talk, Money Talk II, Financially Fit and Fabulous in Your 40s and 50s". She is the Practice Area Leader for corporate professionals and executives at wealth management firm CI Brightworth in Atlanta. Advising busy corporate executives on their finances for nearly 20 years has been her passion inside the office. Outside the office she's an avid runner, cyclist and supporter of charitable causes focused on homeless children and their families.