5 REASONS TO NEVER GIVE YOUR CHILDREN AN OUTRIGHT INHERITANCE, WHY YOU DON’T WANT YOUR INHERITANCE OUTRIGHT, AND WHAT TO DO INSTEAD
Welcome to one of the biggest considerations you will face as an adult: what will happen beyond the short time you are here, how you will leave behind the inheritance you are creating, how you will receive the inheritance of your parents, care for them in their old age, and create more with what they are leaving behind.
Despite knowing how important it is, most people give these issues little thought. As a result, millions of families suffer in court and conflict, and heartache and pain, unnecessarily.
The people who are willing to step fully into their own adulthood and make conscious choices about how to leave (and receive) their inheritance, can find the process to be deeply healing to the entire familial line, honoring the ancestral lineage and deeply serving the future generations.
So, let me begin by congratulating you for making it here. You’ve already taken a much bigger step into the conscious creation of life by facing the reality of death than most people ever will.
If you have little kids, you may consider creating a trust for your life insurance and investment accounts to make sure they have everything they need in case you die too soon. So they don’t get too much before they are ready, and you can choose who will handle it for them until they are. And, to make sure they have what they need when they are ready.
Once your little kids become teenagers, depending on the kind of teens they are and how confident (or not) you are about your parenting skills, you may begin thinking about how you can protect what you’ve accumulated through your life from them. I saw this quite frequently in my law practice over the years.
Parents would come in to see me when their children were young, looking to create a nest egg for their little ones. And then, as their children became unruly teens and young adults, they would be looking to protect that very same (now, usually larger) nest egg from their children and their errant ways.
As their children grew and began to individuate, the parents began to lose trust in the prospect that their progeny would ever be able to manage their own finances well, let alone the inheritance they would receive without working for it on their own.
And they almost certainly don’t have faith that their kids will take care of them financially, as they age.
If you have handled their teen years well, ideally you will start to see that your children will, in fact, grow into trustworthy, contributing members of society and that they will receive what you leave behind just fine.
Alternatively, if you didn’t handle their teen years so well, as they grow into adulthood, you may have more and more confirmation that they will never be able to handle what you’ve created.
Children will grow into adulthood somewhere between totally responsible, and completely disabled. And, at times, they may swing between the two.
You may even sometimes swing wildly between feeling totally capable and completely irresponsible with the life you are creating and the legacy you are leaving yourself. In most cases, your children will reflect back to you, your own fears of your own shortcomings, Perfectly.
Regardless of where you find yourself on this spectrum, part of being an adult means entering into a real consideration of what will happen beyond the short time you are here, and how you will leave behind the inheritance you are creating.
Becoming a full adult also means true consideration about how you will receive the inheritance of your parents, care for them in their old age, and create more with what they are leaving you.
It may be that you have not begun thinking about any of this yet. If you haven’t, welcome to a big step in the path toward your own adulthood.
Regardless of whether you are leaving behind an inheritance or preparing to receive one, if you’ve talked with a traditional lawyer about writing a will or creating a trust or have already done so, or if your parents have, most likely that will and/or trust is designed to hold assets until you (or your kids) are deemed old enough to receive the money being left behind, and then the trust terminates and distributes outright.
And this is exactly how you do not want it to happen.
If you have a trust in your life (either your own for your kids or the one your parents have created), read the language and you’ll most likely see something similar to the following:
- With respect to each share provided for a child of the Grantor then living:
- Because each child has attained the age of 25 years, each child shall have the right, by written request, to withdraw one-third in value of the remaining assets of such child’s share then being held in trust.
- Each child who has attained the age of 30 years, and each remaining child upon attaining such age, shall have the right, by written request, to withdraw one-half in value of the remaining assets then being held in such child’s share.
- Each child who has attained the age of 35 years, and each remaining child upon attaining such age, shall have the right, by written request, to withdraw the remaining assets then being held in such child’s share, and if that child does so withdraw the remaining assets, the Trust as to that share shall terminate.
If you see something like this in a trust, what it means is that when the beneficiary (the person named to receive the trust assets) reaches the age of 35, whatever is left behind through the trust is distributed outright, to be put in the beneficiary’s personal bank account, and the trust terminates at that point.
You may think this sounds right because, by the age of 35, a beneficiary should be mature enough to handle the assets being left behind.
And while that may be the case, and even if that is the case, this is not the best way to leave (or receive) an inheritance.
When a trust terminates and inherited assets are then brought into the beneficiary’s personal account, those inherited assets then become subject to risk from creditors of the beneficiary, from a future divorce of the beneficiary, and from a lawsuit against the beneficiary. And, even if none of those things ever become an issue, the beneficiary is not incentivized to grow the inherited family wealth, but instead to spend it on consumables, rather than to create with it.
There is a much better way.
Before we get into that much better way, let’s look at the 5 ways most people lose their inheritance after it’s distributed to them outright.
01 | FUTURE DIVORCE
According to current statistics, forty-two percent (42%) of people will divorce during their lifetime. In most divorces, the property is divided evenly. While many people (and even lawyers) think that property division after marriage does not include an inheritance, this would not be the case for inherited assets that are brought into the shared property of the marriage. In practical reality and in most cases, an inheritance received during a marriage will be commingled into the marital property and become subject to division.
For example, let’s assume I receive an inheritance of $50,000 and I use that $50,000 as a down payment on a home I share with my spouse. We live in that home and use marital assets to pay the mortgage. Some years later, we get divorced. In most cases, the full value of that marital home will be considered an asset of the marriage, and the inherited assets absorbed into the marital estate for division upon divorce. Inheritance, lost.
So if you have a married child or a child who will get married in the future, and you leave them an inheritance, and they later divorce, as much as half of their inheritance could go to their ex-spouse.
If you aren’t working as hard as you are to support your child’s future ex-spouse, you may want to do something different. And, you may want to ask your parents to leave behind your inheritance, no matter how small, in a different way to protect what you are receiving from a potential future divorce.
SIDE NOTE
while an inheritance could be protected from divorce with a prenuptial or postnuptial agreement that states that inherited assets do not become part of the marital property, it’s far more common that when people marry they do not want to bring up the consideration of what happens when they divorce, and so they don’t.
When you leave your assets to your children in a protected (yet accessible to them) trust, which we will discuss below, or you receive your inheritance in a protected manner, you can avoid the conversation about prenups and postnups altogether and know the inheritance is protected.
02 | MISMANAGEMENT
According to a study by Prof. Jay L. Zagorsky of Ohio State University, 40% of individuals inheriting less than $100,000 will spend or lose the entire inheritance, and 18.7 % of individuals who inherit more than $100,000 will spend or lose the entire inheritance.
In many cases, inheritors can think about their inheritance as if it were a lottery prize. And, lottery winners saved just 16 cents of every dollar won and bankruptcy rates soared for winners in just 3 to 5 years after winning.
Why does that happen?
Because lottery winners, and many inheritors, are not properly prepared to receive the money that comes in it ends up creating problems they were not well-prepared to handle.
The book Beer Money: A Memoir of Privilege and Loss by the would-be inheritor of the family fortune that Schlitz Beer created, Frances Stroh, illustrates perfectly the impact of what happens when junior family members are not properly prepared to receive their Inheritance.
Rampant addiction. Mismanagement of the family business. And, ultimately loss of the entire $700 million family fortune, which would have been worth $9 billion today just by matching the S&P 500, if not lost to mismanagement.
And this is certainly not limited to the ultra-wealthy.
The Stroh family fortune was able to last 5 generations before mismanagement caused the loss of it all, simply because of how much was passed on, but a smaller amount of money being left behind is likely to be lost before it even makes its way down to the grandchildren.
Using a trust structure that keeps assets in trust while preparing future generations on how to use what’s left behind, even when it’s not that much relatively speaking, is a key strategic decision that can result in more family wealth instead of a squandering of what’s been created.
03 | EXTREME DEBT/BANKRUPTCY
When an inheritance is left outright to a beneficiary, if that beneficiary ends up in extreme debt, or even bankruptcy, the inheritance will be lost.
Possible causes of such debt are a business venture gone bad, a health event, such as addiction, mental illness, accident, or disease that results in either a temporary or permanent inability to work in combination with staggering medical bills, or an accident, resulting in judgment, as discussed below.
Extreme debt, and even bankruptcy, does happen to good people and if you leave an inheritance in a Lifetime Asset Protection Trust, instead of outright, you can ensure that what you leave behind will never be at risk due to a mistake or unexpected health issue.
04 | LAWSUIT
Unintended neglect that injures someone’s person or property could wipe out an inheritance you leave your children if you distribute your money outright to your children.
For example, ACE Financial Services, Inc. in 2012 found these lawsuit judgments:
- $49 million judgment in California for an automobile accident where the family of a 21- 21-year-old college student sued drivers of two vehicles involved in the multi-vehicle crash. The plaintiff’s counsel claimed one defendant was sleep-deprived, while the other was on their cell phone. The plaintiff was in a coma for one month and is expected to require lifetime 24-hour care.
- $20 million judgment in Florida for an ATV accident where a teenage male was killed while riding an ATV on the neighbor’s property. The neighbor had invited him to drive the ATV, permitting him to operate it without proper safety equipment and without adult supervision. The teenage male struck a fence and was decapitated.
- $11.9 million in Florida for an internet defamation suit brought by a Florida consultant against a Louisiana woman for posting defamatory statements about the plaintiff on an internet bulletin board. The defendant called the plaintiff a “crook” and a “fraud.”
- $5.9 million in Maryland in a dog-bite case where a 16-month-old child was attacked and killed by a pit bull kept at the home of a family friend.
In the Florida ATV case, the defendants thought they were doing the neighbor’s son an act of kindness by allowing him the “fun” of driving the four-wheeler around the family property. Apparently, they didn’t tell the young man about the barbed wire on the property. Their intended neglect, resulting in the death of their neighbor’s son, was not seen as a good deed by the parents or the court, who ordered the $20 million judgment.
On a smaller level, but just as impactful financially, a friend recently called me because he accidentally left a faucet running at a friend’s house where he was visiting and the resulting flood caused $413,000 in damage that the insurance company is now looking to collect. If he had an inheritance coming his way outright, it would be wiped out by this potential claim.
As we can see, well intended, but neglectful behavior on the part of your children could wipe out any inheritance you leave them. But if you choose to use a Lifetime Asset Protection Trust to protect what you are leaving behind, an accident wouldn’t wipe out what you’ve worked incredibly hard to pass on.
05 | LOST WORK ETHIC
My father once said, “Some people can’t handle prosperity.” He was right. In fact, most people cannot.
For example, Thomas Stanley and William Danko in their book, The Millionaire Next Door, uncovered research showing that children who received an inheritance were worth four-fifths less than others in the same profession who didn’t.
Vic Preisser, of the Institute for Preparing Heirs, says that unprepared children who inherit money are susceptible to excessive spending, identity loss, and guilt over receiving money they didn’t earn.
Preisser says, “In a year to 18 months, everything falls apart — marriage, finances — and if there is a drug problem it becomes worse.”
Leaving an outright inheritance to our kids may do harm instead of good. But there is an Alternative.
As we can see, an outright inheritance is NOT the best answer for your kids. And if you are the “kid” who might be receiving an inheritance, receiving it outright may sound good, but it really wouldn’t be best for you.
The book Painfully Rich by John Pearson, about the family of J. Paul Getty (who died with $2 Billion to pass on), is illustrative. Getty was notoriously frugal and the way he prepared his children to inherit, or perhaps more notably didn’t prepare his children, caused his children and their children enormous amounts of grief that resulted not necessarily in mismanagement of the money left behind by Getty, but mismanagement of their lives.
We’ve got a plan for your family that is far, far better.
THE ALTERNATIVE
An alternative to an outright inheritance to your children (“outright” meaning they both personally own and can personally lose the inheritance) is to gift your assets to your children at the time of your death via a Lifetime Asset Protection Trust.
Or, to ask your parents to leave whatever they may be leaving behind to you in a Lifetime Asset Protection Trust.
A Lifetime Asset Protection Trust can be drafted into a regular Revocable Living Trust to give your children (or you, if you are the “child”) full control of the inheritance (if you choose), but at the same time ensure they never “own” the assets they inherit in such a way that those assets would never be at risk of a divorce, lawsuit, creditors or mismanagement.
Because the rule of law is you can’t lose what you never owned, you are gifting your children (or being gifted) with airtight asset protection, of the kind they (or you) couldn’t give (or create) otherwise at any price.
When you leave (or receive) an inheritance via a Lifetime Asset Protection Trust, the trustees of the trust own the property, not the beneficiary of the Trust. What that means is that if there is a divorce, a bankruptcy, or a legal judgment, the inheritance cannot be lost. It’s totally protected.
From a management perspective, the Lifetime Asset Protection Trust can be used as a vehicle for education about investing, giving, and even business by allowing the beneficiary to become a Co-Trustee of the Trust, with someone you’ve chosen and trust to support their education.
You can even build in provisions to allow your child to become the Sole Trustee of the Trust or the right to become Sole Trustee at specific intervals, as well, giving them effective full control without the risk of ownership.
If you are concerned that receiving an inheritance in a Lifetime Asset Protection Trust somehow makes it so that your inheritance wouldn’t be available to you, or would restrict you in some way, have no fear.
Your Lifetime Asset Protection Trust can be structured so that you receive control and access to use the inheritance with no restriction, so long as you make all investments inside the Trust, and only take money out of the Trust if you would be using it to consume instead of create. All creations could be funded by the Trust and remain protected by the Trust vehicle.
There are quite a few nifty additional ways a Lifetime Asset Protection Trust can be structured so that this trust meets the needs of your unique family.
Most importantly, if you are working with the right kind of lawyer, you can use this kind of planning as an opportunity to hold regular family meetings with senior and junior generations to plan for the passage of your Family Wealth.
You see, Family Wealth goes far beyond money. When viewed properly, you can see the money that’s left behind from one generation to the next as a catalyst for family connection, passing on family values, and the opportunity to clarify how the family uses its full TEAM (time, energy, attention, and money) resources.
This is what Life & Legacy Planning is all about.
If you would like to learn more about how to build a Lifetime Asset Protection Trust into your plan for what you are leaving behind, or what you will receive, start with a Life & Legacy Planning Session with a Personal Family Lawyer® or Family Business Lawyer.
In addition to considering whether a Lifetime Asset Protection Trust makes sense for you and your family, your Life & Legacy Planning Session will get you more financially organized than you ever have been before, ensure none of your assets are lost to your State Department of Unclaimed Property, as well as keep your family out of Court and out of conflict when something happens to you.