Your financial stability has given your family a great life and you want to see this carried down to future generations, including your grandchildren. Here are some tips for leaving an inheritance to people who may just be toddlers — or even teens now — but will be adults in the future.
Understanding inheritance options
As part of your estate plans, you can utilize a trust. This is an estate planning tool that helps ensure a typically smooth transfer of assets and property once you pass way. You can still control the trust while you are alive, but will appoint someone — a trustee — to manage and oversee the distribution of its assets once you pass. This trustee is legally obligated to follow the stipulations you decided on.
It’s natural to want the best for your grandchildren. However, keep in mind that suddenly receiving a large lump sum of money can substantially change a person’s life plans. For example, one second your granddaughter was looking at colleges and trying to decide on a solid career path, but now with money in the bank, she is thinking maybe college can wait? Maybe college is not that important?
To avoid this type of conundrum, there are ways to set guidelines to maintain some control over how your grandchildren can spend their inheritance in the future. Here’s a look at two types of trusts that can help with this:
- Incentive trust – An incentive trust ensures someone will not receive their inheritance until he or she reaches a certain age or achieves a certain milestone, such as graduating from college. Setting up an incentive trust should not be looked at as a bad thing, or a sign that you don’t trust your grandchild, but rather that you are just trying to protect their future.
- Staggered trust – This trust allows for a specified amount of money to be paid out over a certain amount of time. This amount can increase as your grandchild ages and his or her financial needs change. Again, this type of trust should not be viewed as a punishment of sorts, but is rather an estate planning tool to help set them up for success.
Some also go the route of setting specific stipulations in their estate plans as to what inheritance can and cannot be used for. For example, you can include a list of approved expenses, such as tuition or the down payment on a home.
Whatever route you go, know that there is no one-size-fits-all when it comes to estate planning. You need to decide what is important to you and then make decisions that best support those choices.