Summary:
One of the most common worries people have when planning out their estate is that their heirs will burn through the inheritance rather than caring for the assets that took decades to grow. Turns out, recent research shows that is what frequently happens. Nearly 50% of heirs spend their entire inheritance within the first year. In this post I cover:
- The three main problems with sudden inheritances
- How I’m personally managing our estate strategy to mitigate these problems
The three main problems with sudden inheritances
Money takes maturity to manage. We have two young kids. I think a lot about how we should structure our estate to ensure their futures are protected. Probate or unscrupulous advisors are a minor concern compared to protecting them from themselves.
I think back to when I was 18 or 25. Would I have had the self control or even financial knowledge then to handle a sudden six of seven-figure inheritance ? Absolutely not.
Age isn’t the only problem.
Inheritances often come at emotionally vulnerable times. The worst time to transfer assets to your heirs is at your death (which is, coincidentally, when it happens).
Emotions are high. There may be negative associations with the sudden windfall. The urge to spend it to relieve those feelings can be overwhelming.
It’s not an everyday occurrence. Most people aren’t inheriting significant sums every other day. It can be overwhelming and confusing to suddenly receive a huge amount of money for someone who was merely scraping by before.
How I’m going to manage our inheritance strategy
Like most parents, our plan right now is that our children will inherit the bulk of our assets. Here are the three things we’re focusing on as we evolve our estate strategy over the years.
Phased distributions in the trust. Instead of having them receive everything at once, our plan is to do what the researchers recommend. Sequence the payments over several years so they get used to having gradually more and more assets. They’ll get their full inheritance, just not all at once. The goal here isn’t to protect the money from them. It’s to protect them from receiving it before they’re ready.
Financial literacy. Once our kids are a little bit older we are going to teach them about saving, investing, and the importance of impulse control. Specifically, I want to make sure they understand the modern principles of financial independence like building their financial lives around the 4% Rule.
Practice. Assuming we’re still around when they’ve reached early adulthood, we’d start gifting them some assets in their 20s and 30s so they get some reps in managing chunks of assets coming into their accounts. Not life changing amounts, but enough to help them understand how to budget what they need from it and invest the rest.
Liked this post? I write a lot about financial planning for parents with young children. Check out these pieces:
- Affording private K-12 school
- The Four Disadvantages of Trump Accounts
- Four Unique 529 Benefits for Pennsylvania Residents
Nathan
Founder & Lead Advisor
[email protected]
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Kangpan & Co. is a flat-fee financial advisory firm specializing in helping mid-career professionals navigate the career, family, and financial tradeoffs that come with this stage of life. This content is for educational purposes only and is not financial, legal, or tax advice. Consult a licensed advisor for help with your individual situation. Employees and clients of Kangpan & Co. may hold positions discussed in our content. Past performance is no guarantee of future results.