For most parents, earning wealth and preserving wealth are key goals during their lifetime. Though they want to assure a comfortable retirement for themselves, they also want their money to outlive them such that they can provide a financial legacy for future generations. But when should this financial legacy be distributed?
Without an estate plan, a child can receive an inheritance from their parent’s estate, of whatever amount at eighteen, whether that is $1,000 or $1,000,000. Most people would agree that at 18, one is not yet responsible to manage a large sum of money independently and without guidance. What would you have done with a lump sum of cash?
Individuals who establish a will or trust have the ability to determine the appropriate age of distribution. The age of distribution is dependent on many factors including your specific child’s needs, maturity, demonstration of money management, and the amount of money they are to receive. Some parents suggest their child should receive a full distribution or inheritance at a set age, ie 25. However, we often suggest that parents consider a staggered distribution, ie 1/3 at 30, 1/2 of the remainder at 35 and the full inheritance by 40. While that distribution is merely an example, a staggered distribution allows for a child to receive and manage a limited amount of money at each age of distribution, allowing them to mature and grow, and to invest and use the money wisely over time. The staggered distribution also encourages children to work hard and create their own way without being dependent on their inheritance.
While most parents leave a financial legacy for their children at their death, if you have a taxable estate, providing for your children during your lifetime can be very beneficial for you and your children. Establishing a child’s trust and gifting amounts to fund the trust allows you to transfer wealth from your estate to theirs and lowers the amount of your taxable estate at your death. It also allows your children to utilize some of the funds for their needs and you can see a trial run of how your children will handle money, which may affect your distribution plan in your living trust.
To discuss how you would like to plan for your children, please contact us.