According to a report released by U.S. Trust, in the United States there are nearly 1.8 million households that have assets totaling $3 million or more. Many of these families will struggle with how to give their children an inheritance that provides for their needs while not giving them so much that they lose their sense of work ethic and independence. The question being asked is simply, how much is enough?
Trust Fund Babies
The advent of reality television and social media has given the public an eye into the world of some so-called “trust fund kids.” The media attention on Paris Hilton, the Kardashians, and “Rich Kids of Beverly Hills” show us the very worst that can happen when children inherit an abundance of wealth from their families with little to no guidance.
However, there have also been good examples of high profile wealthy people who are determined not to handicap their kids with too much of a good thing. For example, Warren Buffet has gone on record stating that he wants his children to have enough money to feel like they could do anything, but not so much that they could do nothing. Bill Gates has also gone public about his children’s inheritance, bequeathing only a single percent of his assets to each child and giving the rest to charity.
Estate Planning Options
There are a number of ways to structure a wealth transfer to children in an estate plan that sets boundaries in addition to allowing the values of work ethic and giving back to the community to grow. The first step is considering your values, your relationship with your children, and their relationship with each other. Every family is different, and what may work for one family might not work for others.
One option is to set limits on the amount of inheritance for each child. It can be structured as a set amount per child or be done as a percentage of the estate. Another option is to structure the inheritance through a trust that promotes that values that the parent wants.
Some trust funds distribute wealth at certain ages on a set schedule. For example, a child might receive a third of their inheritance at ages 21, then 25, and the final third at 30. Other wealthy families structure a trust to last for generations and empower the trustee to make distributions as necessary according to their guidelines.
Another option for wealthy parents is to establish an incentive trust for their children. In order to claim their part of the trust, a beneficiary must hit certain benchmarks or goals set by the parents. Typical goals for a recipient in an incentive trust include graduating from college, getting a full-time job, committing a certain number of hours to community service, etc.
However, there can be drawbacks to the incentive trust. Backlash against the parents or children finding loopholes in the requirements are common issues seen in incentive trust planning. For these reasons, it is important to discuss with your estate planning attorney about what the best option is for you and your children when it comes to distributing your wealth.