Worried your kids will blow through your money? Here are five ways to protect your assets.
Over the next several decades, it’s estimated that Baby Boomers will pass down $30 trillion in assets to future generations. If you shudder to think what your beloved kids may do with the money you worked so hard to build, you’re not alone.
Research shows that inheritances dwindle significantly in the first few years of someone receiving one, with a study from Ohio State University finding that one in three Americans who receive an inheritance have negative savings within two years of the event.
Why do children blow their inheritance? There are several reasons, says Jan Musil, an Investors Group Tax and Estate Planning Specialist, including not knowing enough about money management to make good financial decisions. It’s also tempting to spend a cheque with several zeros at the end, especially in our spend-thrift society.
Fortunately, there are ways to protect your life savings from being squandered, says Musil.
Put your wishes in a will
The first place to start is to create a clearly defined will, which, says Musil, is achieved less often than you might think. It should list who gets what assets, if a trust should be set up to help administer those assets, and who the trustee should be. While you may not want to put too many demands in the document – get too specific as to who gets which asset and when and you may make it difficult for children to receive their inheritance when they need it – you also want to limit uncertainty. “People will be looking at the will as a place to start,” says Musil.
Trust the testamentary trust
The best way to maintain control over your assets in death is to indicate in your will that you want a testamentary trust created. The trustee, appointed in the parent’s will, would then decide when the beneficiary should receive assets from the trust. A schedule can be set up – $10,000 should be doled out every three months, for instance – but it’s usually left up to the trustee, typically a responsible family member, to release funds when needed. “It’s the simplest and most effective way to make sure your intensions on how the money is spent are followed through,” says Musil.
Explore an annuity
If there’s no obvious trustee to oversee a testamentary trust, then you can instruct the executor of your estate to purchase an annuity for beneficiaries. The executor would take a lump sum of money from the estate and purchase that investment. The annuity’s payments would then go to the child. This option isn’t as flexible as a trust, says Musil, so it shouldn’t be your first choice, but it can come in handy if you can’t choose a trustee or if you think the trustee won’t commit to overseeing a trust for an extended period of time.
Give gifts while you’re still alive
Another way to maintain control is to parcel out money while you’re still alive. Not only can it be rewarding to see your children enjoy their inheritance, but you can control who gets what when. There are risks to this approach, says Musil, including giving out too much money and then not being able to cover your own living expenses. “You have to make sure your needs are met,” he says. “Not just the needs of now, but later too. You don’t want to become impoverished by giving gifts early in life.”
Teach your children about money
The best line of defence might have nothing to do with wills or trusts at all – if you teach your kids how to be responsible with money, they’ll be less likely to blow their inheritance. Start teaching them about financial responsibility when they’re young, but continue that education into adulthood, says Musil. Talk to them about your will, your estate plan and bring them into the conversation with your advisor. “It’s about developing good habits,” he says. “Because ultimately, how they spend their money is going to be up to them.”