The Best Holiday Gift: Passing Down Financial Wisdom

Article by Bennie A. Wall, Esq.

With the holidays wrapping up and New Year’s Day right around the corner, now is a great time to reflect on your ever changing family dynamics. As you look around your holiday dinner table at your loved ones, you cannot help but remember how much they have grown over the years. It is hard to believe that since you set out as a young adult trying to make your way in the world, so much has changed and came to be this family you see in front of you.

It is always in early January that I see an influx in clients wanting to come in and visit their favorite estate planning attorney. Many of these clients are just coming in for a check up to make sure that their plan is going to work the way they envision. Over the years, I have had my fair share of clients who come in this time of the year for an update, driven not by their desire to check in, but by their reflection over their most recent family’s holiday dinner.

I am sure you can picture it now. A scene right out of a holiday movie. Your precious daughter brings home the new fiancée. Your son brings home his new girlfriend whose voracious appetite for Prada just cannot be quenched. Or your children giving in to every whelm and desire of your already spoiled grandchildren.

Whether there is a new in-law that you don’t exactly see eye to eye with, you worry about your children’s ability to save for your new grandchild’s future, or your estranged son has given up on the family. I have seen it all. Many times, clients, like you, simply want to be sure that the wealth you have labored your whole life accumulating is well cared for when you are gone.

Many parents worry that their children are not financially savvy enough to properly manage their inheritance and have even less faith in their grandchildren’s generation. These fears are not misguided. A study by researchers at Ohio University found that 33% of people who received an inheritance spent it all within two years of receiving it. Not surprisingly, the numbers are even more staggering when you look only at individuals between the ages of 18-25, 90% of whom blew their entire inheritance in between 12-18 months on average.

Why blowing through an inheritance is so common is hard to truly pin down, but in practice there are usual one of three factors at play: financial immaturity, vices, or entitlement.

Most cases of squandering away an inheritance is due simply to financial immaturity. Seeing this large pool of funds now and how much fun you can have with it is easy to blind even the most responsible of people. The temptation is even stronger with younger adults with less real work and life experience. For many young adults it is harder to truly appreciate the value of a dollar and how far a well saved, invested dollar can grow over time.

So, what can you do to help ensure that your descendant’s inheritances are not used irresponsibly? I have outlined my top three favorite methods below.

Share your wisdom and vision.

One thing you can leave behind that is even more valuable than you wealth is your knowledge and experience, so share your wisdom with your descendants. Tell them your life story and how you grew up, tell them about how you and your spouse worked and saved to amass your wealth, tell them all about your best choices and a few of your worst, and let them know your vision about how you pray this inheritance will enrich their lives after you are gone. Often times this real emotion puts the intangible concept of money in context for your descendants and makes them appreciate the inheritance even more, all the while encouraging them to be good, responsible stewards to their new found wealth.

Write protection into your plan.

A well drafted estate plan can ensure that your descendants do not squander their wealth. There are many options for protection in plans. The most common protection I use in my plans is to require that young beneficiaries not receive control over their inheritance until they are 25 years old. I’ve even had a few clients who insisted on bumping that age up to 65.

For clients who are still not comfortable with a 25 year old receiving the entire inheritance, I often write in that they will receive access to part of the funds at 25, another part at 30, and control over all at 35. This way, if their 25 year old self makes some bad decisions, they get a second and even third try.

If a client’s concern is more than simple financial immaturity, but rather that a descendant has a problem with vices or entitlement, then even stricter protection can be added to the estate plan which can be used as a tool to encourage better behavior and self-sufficiency.

It seems that every family has one member who gives in a bit too strongly to the vices of life. In serious cases, this can lead to real issues with substance abuse or gambling. As a parent or grandparent, you want nothing more than to help that individual get back in line with the straight and narrow, but you sometimes wonder how. In most cases, you want to provide an inheritance for the child, but you also do not want to support their current lifestyle. A great option in these cases are what we call discretionary trusts. A trustee will hold on to funds left for this particular child and will be used to support his or her basic needs. The plan will have incentives built in to it to encourage a healthier lifestyle.

Enlist a professional to manage your descendants’ inheritance.

When all else fails, or you simply want a check on your child/grandchild’s ability to manage their inheritance, consider having a professional trustee, like our law firm: Legacy Fiduciary Services, manage their inheritance. Having a professional trustee will ensure that your planning is followed through and that your wishes are looked after. Professional trustees not only have experience with managing funds and implementing trust, but they also provide a degree of protections from third parties trying to get to your descendant’s inheritance (whether it be a creditor, an ex-wife, or plaintiff in a lawsuit).

These are just a few of the common ways that you may be able to protect the inheritance you are passing down. At the end of the day, a plan can be flexible enough to accommodate almost any of your wishes. If you have any concerns, or just want to learn more about the available options, contact one of our attorney’s today and set up an appointment in the New Year. In the meantime, I wish you the happiest of holidays and all the best in the New Year.