Parents disagree as to when children can handle an inheritance. In 2015, the U.S. Trust conducted a survey of wealthy Americans (with assets of $3 million or more) and asked them at which age they thought their children or grandchildren could handle an inheritance. The issue is important because many parents leave assets in a trust for heirs until they reach a certain age, so the parents have to choose an age at which to release the funds. A common setup for inheritance is to receive a portion when the child becomes of legal age, when they turn 25, and then the remainder when they turn 35.
Survey respondents replied with the following: 4% said ages 18-24, 23% said ages 25-29, 37% replied ages 30-34, and 17% each to ages 35-39 and 40 or older. The majority of parents seem to feel that heirs should receive an inheritance in their 30s.
If you are concerned about leaving your children money and how they might handle it, there are a few strategies you could employ:
Incentive trusts
You can use a clause in a trust document to ensure that your children must do something in order to receive the trust distributions. An extremely common incentive built into trusts these days is an educational component. Some parents will state that their heirs will receive distributions only if they attend college and receive a degree, or they will set up financial incentives to receive a Masters or PhD in the form of larger distributions. Another common form of incentive trusts is to match the child’s income. So if your child is earning $50,000 a year, the maximum distribution they could receive from the trust in a year is $50,000. However, the incentives could be as creative as you wish, and there is no pre-defined incentive trust template that you have to follow.
Financial test
Some parents decide to give their heirs a financial test. Each person is allowed to gift up to $14,000 in a calendar year without tax penalties. Each couple could then gift a total of $28,000 dollars to a child. Then they see what their child does with the money. Do they handle it responsibly? Do they ask for help? If you have any doubts about your child’s financial decisions, seeing how they handle a smaller amount of money before inheriting a large amount could be a good test for both you and them.
Gifts Other Than Cash
This option is similar to the financial test, but without the testing component. You may already know that your child can handle money, but you want to give to them in a way other than cash. One way you can do this is to use the maximum gifting allowance each year to pay off a major debt of theirs, such as a mortgage payment or car loan, using the money they would have inherited later on. Check with your child and their financial advisor as to what would be the best method of going about this, as there may be tax or other financial repercussions for them, but the option is available. This can put your child in a better financial position now and help them prepare to the future without them banking on a large payout later in life by receiving a larger inheritance.