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Inheritances and Estate Planning

| March 17, 2018
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Estate planning is an important part of a family’s overall financial plan.  Grandparents and parents want to do well for themselves, however, they may be torn as to how the next generation may handle the wealth they want to pass down. 

When one dies with wealth, they can choose to leave the assets to their loved ones, a charity, or to Uncle Sam, if they do not plan well. I think we can all agree that unnecessarily leaving money to the government in the form of estate taxes is not our goal, that is why we plan our estate to avoid paying estate taxes.  That leaves us with our heirs and charity, the two preferable places to leave wealth.  Let’s look at giving to charity first.

Giving to Charity

Impressing upon the next generation that it is good to give to organizations that are purposeful is important.  It could be an environmental, humanitarian, disaster relief, animal, other philanthropic organization, or it could be to help fund the endeavors of our local churches.  It could also be helping a struggling family in the house next door.  These are all important causes to give money.  In addition to giving, we teach our next generation the importance of giving because, not only do we need to look after our own needs but the needs of our neighbors and others in extreme poverty, and this helps us, as people, to develop empathy and sympathy for others that are truly in need.  Let your children see you give and remind them why and how much you are giving.  Also, give your time serving as well so they can put real faces on the action of giving money.  Not that we are expecting anything in return, but we get so much back from giving; soul level gratitude, character, a sense of sacrifice, and purpose.  These reasons far surpass the added benefit of a tax deduction for giving. 

Giving to Loved Ones and Family

Giving to people rather than organizations can get sticky because of dysfunctionality, character, or some other thing that causes us to pause before designating someone for a bequest or inheritance.  There are a few things that we can do to protect our loved ones from themselves and to knock out the temptation of “inheritance idolatry”. 

  • Demonstration of financial responsibility
    • Teach your kids the value of money and not to love the money but love the noble things we can do with the money like taking care of our family, taking care of needs around us, making good financial choices and decisions, etc..
  •  Financial need
    • It is alright to treat your children differently when it comes to your estate plan. They don’t all need to be treated equally, however, there is an equitable position to take in who gets what and how much.  One daughter may be a radiologist that is paid six or seven figures.  A son may be high school teacher that is responsible but doesn’t earn a high salary and may have a few troubles building his retirement and taking care of his family.  Daughter doesn’t need to be treated equally because she will probably be quite wealthy.  Son, will probably need more help so giving him more of the inheritance is based on an equitable measure. 
  •  Unhealthy fixation on the assets rather than relationship with family and others
    • Materialism is a big problem in the US. Keeping up with the Joneses.  I’ve got to have the newest of everything so that I can live.  Many people think more about increasing their standard of living once an inheritance is received.  Do not be tempted to go wild with new “things”, rather take a family vacation and building memories is fine to do for your family.  You were blessed with this money, you didn’t earn it, be a blessing to others with it too. 
  • Sense of entitlement
    • “I don’t have to apply myself since I know I’m going to receive an inheritance” is a common statement around the topic of inheritance. Responsibility goes out the window, diligent work is shunned, apathy sets in.  Remember, your parents and/or grandparents did all the work for you to even get any of this so treat it as if the only way you could receive it is that it comes with a stewardship/fiduciary responsibility attached to it and that it isn’t even yours.  Continue to work hard but enjoy some of it from time to time.  Your children will be watching you.
  • Spendthrift
    • Habitually spending money to make themselves “feel” good while not be responsible as a steward of the money.

If you have people in your family that these characteristics, then you might include other language in your legal documents that would incentivize the kids to grow and remain responsible.

  • Use trusts to protect the assets from creditors, litigation, divorce, and from the kids’ potential destructive behaviors
  • Within the trusts, you can dictate (control from the grave) that your kids must meet certain requirements to receive money, i.e. complete a bachelors or masters degree, maintain a modest lifestyle, be gainfully employed, paying bills on time and keeping debt to a minimum, married, and whatever other “restrictions” you want to put in place.

It is documented that within about 18 months of someone receiving an inheritance, the money has all been spent, much like the statistics when someone winning the lottery.  An inheritance is not a lottery, it is a lifetime or two of a family’s hard work not to be squandered, but to perpetuate responsibility, provision, and generosity.

It comes down to a few things:

  • learn responsibility with money early
  • practice frugality and stewardship often
  • enjoy the inheritance with your family to build memories
  • teach your children well to replicate the generosity and stewardship
  • give, generously, some of it away every year
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