How to Leave Your Kids Money, Not Drama

An inheritance can be a gift or a burden. Make sure your kids get the most out of what you leave them.

by Jean Chatzky
Photograph: iStock

In this Web-exclusive bonus, More’s consulting money editor tells how to make your legacy a boon, not a burden, to your heirs. For the rest of the story, click here.

Is there any way to make sure your kids treat their inheritance responsibly?
Financial writer Liz Weston—author of the new book The 10 Commandments of Money—is one of the most financially responsible people I know. When she turned 30, she came into a chunk of cash “big enough for a down payment on a house,” as she puts it. The money originally was a “memorial” to her great-uncle, a man she never met who was killed in the Korean War. Weston’s grandmother created a trust fund to benefit his nieces and nephews. Now Weston and her husband want to do the same for their daughter. If they die prematurely, their estates will create a trust for their daughter that will dole out money to her over time so she doesn’t spend it all at once. While they’re still here, they plan to teach her about using the money wisely. By instilling in her “the idea that we are the stewards of this money,” Weston says, they’re trying to “make sure our daughter gets some money to buy a house or start a business if at all possible.”

Research shows that if an inheritance is a surprise, recipients tend to spend more that they did before, work less or put more away for retirement—all perfectly pleasant options. But knowing that the money will be available does more than create options: It can appreciably broaden the heirs’ life choices. If someone has been told ahead of time that she’s going to inherit, say, $200,000 when her grandparents die, she may decide to pay for college outright rather than take on loans, or buy her forever house rather than a starter, or open her own restaurant. “In general, if there’s less uncertainty about what’s coming down the pike, you can make better financial decisions,” says University of Illinois economist Jeffrey R. Brown, who published a paper on the topic last year. “It’s not a perfect model. A lot depends on the individual receiving the inheritance. But on the whole, advance notice is a good thing.”

Estate-planning attorney Jon Gallo, coauthor, with his wife, Eileen Gallo, of Silver Spoon Kids, suggests two other ways to encourage financial responsibility. The first is to give your future heirs some of the money before you die. “If you want your kids to learn to play in the sandbox, they have to have sand,” he says. “They have to have money to learn to manage it responsibly.”

The second is to establish what he calls a financial-skills trust—putting the money in trust for your children and naming a trustee. But instead of doling out the money based on age, the trustee evaluates how well the kids have mastered six financial skills: the ability to live within their means, to use credit responsibly, to save sufficiently and habitually, to create a budget, to live within that budget and to manage (by investing) the money they’ve saved. The trustee then provides access to funds only as the child proves ready for them. “These are much more objective benchmarks than the sort of trust that allows a child access to money because he turned 25 or because she got an MBA,” says Gallo.

How do you prevent an inheritance from becoming a burden?
Two things turn an inheritance from a delight into a nightmare. The first occurs when the giver attaches too many strings. That’s what happened to Barbara Blouin, author of The Legacy of Inherited Wealth. Her father set up a trust that she says was just too strict: “I couldn’t leave any of that money to other people in my will. I could never take the principal out. There were so many conditions that I wasn’t even happy about having the money.” If you insist on conditions—and Eileen Gallo doesn’t encourage them—it’s important to be very clear. Let your adult children know well ahead of time that they won’t be able to do whatever they want with the money, and tell them why.

The second reason inheritances go awry is because they aren’t given equally. “I tell my clients that children equate equality of love with equality of inheritance,” Jon Gallo says. “If you’re going to distinguish in the amounts you’re giving to your children, tell them why you’re doing it before you die. Otherwise it’s quite likely to generate hostile feelings in which one child blames another for getting more.” That’s not to say there won’t be situations where inequality is called for. You may remember the $100,000 that you gave one child for a down payment on a house and decide to deduct it from her inheritance. Just make sure she remembers it, too.

First Published Mon, 2011-05-16 16:22

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