Children turn 18, and all of a sudden, with a snap of a finger, they are Adults, for all legal intents and purposes. Some of those young adults stand to inherit millions in the way of real estate, financial assets, and life insurance death benefits. But are they able to manage a substantial inheritance as such young adults? The jury is out on how young is too young to inherit?
Receiving a large inheritance sounds like a blessing, but it can be a traumatizing burden when received by young people who are unprepared to manage it. Not only is it stressful on the beneficiary, but the chances of mismanaging and wasting the inheritance is significantly higher. Clearly not what the parents worked so hard for.
Amassing assets comes with the responsibility to protect them. So does bringing children into the world – and that includes, protecting our children from themselves, and from their creditors.
A great way to do this is by setting up a living Trust which includes spendthrift protections, creditor and divorce protections, substance abuse protections – all things harmful that cause an inheritance to be wasted in no time.
Another strategic decision is providing for tiered distributions to children – a small fraction of assets when they are younger, and bigger fractions as they mature and become more responsible and established. Such staggered distributions (a set percentage at age 25, then at 30, then at 35, for example) allow for the child to make “mistakes” with only a small fraction of the money, and hopefully learn from those mistakes by the time they receive the next distribution, and put the balance of the inheritance to good and productive use.
One of Parents' ultimate fears is that their child's inheritance could be “divided” in divorce, and the departing spouse ending up with half of it. Providing in the parents' trust for clear earmarking of inheritance as the child's sole and separate property, and instructing the Trustee to guide the child to set up a separate property trust of their own to be the recipient of such inheritance, prevents the inadvertent and fatal mistakes of commingling inheritance (separate property) with community property, which is then divisible in divorce.
Including a comprehensive “No Contest” clause in the Trust further ensures that any beneficiaries (or their significant others) will not be tempted into contesting the trust provisions if their “expectations” don't match with their parents' wishes as expressed in the Trust.
When substance abuse issues are present, it is imperative that the Trust sets forth adequate conditions and protections allowing the Trustee to safeguard the child's inheritance, while utilizing it for the treatment and betterment of child.
Living trusts have many benefits, and the biggest one of all is that they are meant to protect not only assets, but children – from themselves, and from those who may pounce and squander their inheritance. Be sure your trust has some (or all) of the above protections in place; and if not – perhaps it's time to have your Trust terms updated.