How to Leave Assets to Adult Children in Estate Planning
When considering how to leave assets to your adult children, first decide how much you want each child to receive. Most parents want to treat their children fairly. However, this does not necessarily mean each child should receive equal shares of your estate.
Is It Fair to Leave One Child More in an Inheritance?
Yes, it may be appropriate; for example, you may want to give more to a child who makes less income. Perhaps your daughter is a teacher, while your son makes more income as an owner of a successful business. Or you may want to compensate a child who had taken care of you during a serious illness.
When a parent leaves everything to one child, there can be legitimate reason for doing so. For instance, you may have one adult child who will be taking over the family business. Maybe you’ve already provided substantial financial support to one of their siblings.
Either way, be candid with your adult children about your estate plans. This includes having honest conversations and explaining to them the reasons behind your decisions regarding the division of your assets. In addition, this can help prevent any arguments between them down the road.
Are Adult Children Entitled to an Inheritance?
No one says that you must give everything to your children. In fact, some parents worry about leaving too much money to their children. You may want your children to have enough money for whatever they need, but not so much that they are unproductive.
You may prefer to leave more to your grandchildren and future generations, which you can do through a trust. If you are charitably inclined, you may want to put your funds toward a generous contribution to a nonprofit.
Next, decide how you want your children to receive their inheritances. You have several options from which to choose.
Option 1: Pass on Some of Your Inheritance Now
If you can afford to give your children or grandchildren some of their inheritance now, the benefits are twofold. For one, you will experience the joy of seeing the results. For example, in choosing to transfer some of your wealth now, you could help a child with:
- buying a house,
- starting a business,
- becoming a stay-at-home parent to your grandchildren, or
- covering their children's college costs.
In addition, this would let you see how each child might handle a future, larger inheritance.
Option 2: Provide a Lump Sum Distribution
If your children are responsible adults, leaving them their inheritance in a lump sum may be a good choice. If they are older, you may worry they won't have many years left to enjoy the inheritance. Providing their inheritance in a lump sum can help alleviate this concern.
Once a beneficiary receives assets, they are at risk of losing them, whether to creditors, a lawsuit, or a divorce settlement. Their spouse could even access any assets that are placed in a joint account. Likewise, if their spouse has been added as a co-owner of an account, they can access the funds.
A lump sum distribution may not be the right choice if you're concerned about:
- a son- or daughter-in-law ending up with your assets,
- a creditor seizing them, or
- child spending their inheritance recklessly.
Option 3: Give Your Heirs Their Inheritance in Installments
Many parents would like to give their children more than one opportunity to invest or use an inheritance wisely. Installments of an inheritance can be made at certain intervals. For example, you could give half of the inheritance upon your death, and the other half five years later. You could also opt to give your children their inheritance only after they have reached a certain age.
In either case, be sure to review your instructions from time to time and make changes as needed with your attorney.
If you live a very long time, your children might not live long enough to receive their full inheritance. Or, they could live past the distribution ages and, by default, receive the entire inheritance in a lump sum.
Option 4: Keep Assets in a Trust
You can keep your assets in a trust and provide for your children without actually giving the assets to them. Assets that remain in a trust are protected from a beneficiary’s creditors, lawsuits, irresponsible spending, and former and current spouses.
Consider the following scenarios:
- You may have a dependent with special needs or a child who has become incapacitated due to an illness or accident. Establishing a special needs trust can provide for this child without jeopardizing valuable government benefits.
- Perhaps your child needs some incentive to earn a living. With assets in a trust, you can offer to match the income that the child earns.
- If your children are financially secure, you can keep the assets in trust for your grandchildren and future generations. This way, you can still provide a safety net if your child’s situation changes and your child needs financial help.
After working over the course of your lifetime to accumulate your wealth, you want assurance that your assets are protected. Keeping your assets in a trust gives you the most flexibility, control, and protection over them.
Consult With an Estate Planning Attorney
There is no one right way to leave assets to your adult children. Many people may choose to leave their assets in trust for the benefit of their children or grandchildren for various reasons. Yet this is not the only option available to you. Regardless of your ultimate choice, this is an important decision that should be considered with input from your estate planning professional.