It’s a sobering thought, that nobody wants to ever have to think about. But the sad reality is that you do have to ask yourself if you would be happy with your assets winding up in the hands of a future ex-spouse of your son or daughter. In this article we’ll cover some ways to protect your child’s inheritance.
But before we get into the blog…
We are financial advisors in Morristown, NJ, providing financial advice for New Jersey residents as well as folks across the country. As we get started, you may want to check out these financial planning blogs we’ve written:
How to get through probate (without draining your bank account)
Filing your tax return: traps to avoid
Do I have to pay taxes on an inherited annuity?
Let’s go!
The wealth transfer and its dilemmas
People who are currently in their 50s or 60s have likely already received an inheritance from deceased parents, or are likely to do so in the near future. If you need to spend this money on your own retirement, so be it. But what if you don’t? What if you, through wise saving and investment choices, are likely to gift your inheritance on to your children?
It’s sobering to think about, but the family dynamics in America are worrisome. With divorce so common, there is a significant chance that were you to gift your assets to your children, part of the inheritance would wind up in the hands of a future ex-spouse. This presents quite a conundrum. You wouldn’t want to cut your son or daughter-in-law out of the will, but you also wouldn’t want your family’s legacy to fall into the hands of someone it was not intended for.
Estate planning can present solutions to these challenges. There are many options that you should discuss with your attorney. Please don’t interpret this as legal advice, but here is what we have seen to be the most viable way to protect your child’s inheritance. Our views are shaped by our years of acting as wealth managers to many families who have faced this predicament.
No easy solution
As with any sensitive matter, there’s no cut-and-dry solution. The specifics of this will vary, but for most people, the way to protect a child’s inheritance involves setting up a trust.
Let’s start with the basics. What is a trust? We wrote a blog about trusts if you want to learn more; but for starters, here are the fundamentals.
- A trust is a legal entity
- There are named beneficiaries who have a right to the assets
- It allows you to control who gets your money, and how it is given to them
- Certain kinds of trusts allow you to avoid probate, a lengthy and expensive process during which a challenger may try to contest the instructions provided by the decedent and wrangle for assets
How does a trust protect my assets?
Although we work with many families who go through the estate planning process in an effort to protect the inheritance they pass to their children, we are not attorneys. The following provides general guidelines but can’t be interpreted as specific guidance particular to any one individual; for such recommendations please consult your legal advisor.
You must list the trust as the beneficiary of your assets, not your children or grandchildren. There are a few reasons for this but let’s consider the following scenario. Let’s say, for example, that you were to pass and leave assets to your child, who then passes, leaving your grandchildren to be cared for by the deceased’s husband or wife, whom you are “not so sure about”. They are going to be the ones in charge of your grandchild’s money. You have effectively gifted them the inheritance for them to do with as they please.
Trusts not only protect assets from unfavorable family dynamics like these, they also can shield your child from professional liability. This is helpful if you are worried about having a child who is a doctor and may be susceptible to malpractice claims. When trying to protect your child’s inheritance, it’s useful to consider all risk factors that could possibly come into play.
Timing matters
As a side note, it’s a good idea to think hard about at what age you decide your beneficiaries receive access to the inheritance. Many people pick ages 25 to 30. Make sure you ponder this in earnest. Are your children like to be mature enough, at that point, to do the right thing with your hard-earned money? The heir may not be able to make wise decisions with the inheritance even at that age.
How are you going to invest the inheritance?
We hope that our blog about protecting your child’s inheritance was useful.
We are financial advisors in Morristown, NJ serving the local community and beyond. If you have questions about how to invest or manage an inheritance you are receiving in New Jersey or elsewhere, or wish to help your heirs to do so…or (like us) are just plain old Bruce Springsteen fans, reach out and send us a message.