Preparing your kids for inheritance so that it doesn't destroy them | INVESTED MOM
It's no secret that money can be a major source of stress and conflict in families. When it comes to inheritance, this is especially true. Most parents want to leave their children with a financial security blanket that will help them through life, but many assume that their kids will automatically know what to do with a windfall of cash. The reality is that most people are ill-prepared to handle such a financial injection of cash or assets when there is a death in the family.
It's amazing to think about how our parents pass down genetic traits to us, and how those traits can be passed down through generations. Just as our parents' DNA affects us, so does their money-handling DNA. If our parents were good with money, we're likely to be good with money. But if they were poor money managers, we're likely to have the same struggles. The psychological inheritance of traits is more controllable and can be even more profound for setting your kids up for success.
This is why it's so important for parents to have conversations with their kids about money, and to start teaching them good financial habits from a young age. It's also important to have these conversations long before any inheritance comes into play. If you’d like to get started on this, check out my 10-Step Guide to Financial Freedom - it’s free for you to download.
Here are a few steps on how to prepare your kids for an inheritance, so that it doesn't destroy them:
Seek professional help
If you're not sure how to prepare your children for an inheritance, it's important to seek professional help. Many financial planners and advisors can help you develop a plan that is tailored to your specific situation. Also adding a lawyer and accountant to your financial team will help you navigate everything that goes into inheritance tax and how your beneficiaries will be impacted.
Arrange for a financial evaluator or coach
This is where a financial evaluator or coach can be extremely helpful. A financial evaluator can help your kids understand the implications of inheriting money and how best to use it to improve their lives. A coach can also provide valuable guidance on how to avoid making common mistakes that can lead to financial difficulty down the road. By taking the time to prepare your kids for an inheritance, you can help them avoid some of the pitfalls that can come with receiving a large sum of money.
This person can be either a family member or a professional, but they should have relevant experience in dealing with inherited wealth. Especially topics like estate tax, inheritance taxes, income tax and potentially experience with the internal revenue service. It’s also essential that you have a good relationship with this person and trust them implicitly.
Before hiring your evaluator/coach
You must check their references and qualifications carefully. You want someone who specializes in estate taxes and who knows the law around inheritance tax.
Estate and inheritance taxes
Estate and inheritance taxes can be complicated and vary based on where you live and whether you had a familial relationship with the deceased person.
It also matters what type of assets are being inherited. The type of assets inherited can be things like personal property or property held in a revocable trust, cash or equities held with financial institutions, or even items like fine art or valuable jewelry.
Depending on how the estate was structured, most inherited assets are subject to
It's important to discuss your personal tax situation with a tax expert to determine the tax rates you and the estate pays and whether there is an exemption on your taxation, including what fees are applicable and what is considered exempt. All beneficiaries should seek professional advice on inheritance tax based on what they get paid and their tax rate. There may also be ways to get the tax deferred.
Investment vehicles
Bequests can be made for specific purposes, like education or starting a business. There are some benefits to setting up a trust to provide income or protect assets.
Setting up a trust fund or some other type of financial planning could also help so that your kids don't have to worry about managing the money themselves. This can help them avoid any financial burden when the estate passes to them, and allow them to focus on enjoying their inheritance. These are just a few examples—there are many options available, and you should discuss them with your attorney to find the best solution for your family.
Charitable giving and philanthropy
A professional can also help you (and your kids) navigate philanthropy and which charitable organizations align most with your beneficiaries' values if they choose to donate all or part of their inheritance.
Teach them the value of money
One of the most important things you can do is to teach your children the value of money. Many people assume that kids will automatically know what to do with a large sum of money, but this is often not the case. It's important to instill in them a strong work ethic and to promote the importance of saving from a young age.
Instill values that don't revolve around money
The best way to prepare your children for their inheritance is to instill values that don't revolve around money.
First, give them a sense of perspective
When you're young and don't know any better, you tend to believe that the world is made up of two groups: those who are rich and powerful and those who aren't. But this isn't true at all! Many people live below their means and have happy lives without being rich or powerful in the traditional sense. Explain this concept to your kids so they understand that wealth doesn't necessarily mean power or having material things; it's about being able to live a life you love, on your own terms, not how much one has compared to others' standards for what constitutes "enough."
If nothing else comes from this conversation, it should help them avoid falling prey to the pitfalls of materialism—which include becoming obsessed with acquiring possessions (and often blaming others when they can't), making decisions based on short-term rewards instead of long-term benefits, regretting previous purchases (or feeling guilty over unwise purchases), taking out loans from lenders who exploit these same weaknesses...the list goes on!
Help them develop a financial plan
If you want your children to be prepared for an inheritance, it's important to help them develop a financial plan. This plan should include short-term and long-term goals, as well as a budget. It's also important to have a plan for what to do with the money if you were to unexpectedly pass away.
Here are some steps to consider when creating a financial plan:
1. How much money do you want to save each month?
2. What are your short-term and long-term financial goals?
3. What is your budget?
4. What will you do with the money if you were to pass away unexpectedly?
5. Who will be responsible for managing the money?
6. How will you monitor your progress?
7. What happens if you need to access the money before you reach your goal?
8. What are the tax implications of inheriting money?
9. What are the estate planning considerations for an inheritance?
10. Are there any other factors that need to be considered?
Creating a financial plan is a great way to help your children prepare for their inheritance. It will give them a roadmap to follow and help them make smart decisions with their money and your inheritance. If you want to learn more, here are 7 ways to teach kids about money to start building their future wealth today.
Encourage communication
It's important to encourage communication between you and your children about money. This way, they will feel comfortable coming to you with any questions or concerns they may have.
Many people are afraid to talk about money because they don't want to seem greedy or ungrateful. But, it's important to have these conversations to avoid any misunderstandings or conflicts down the road.
Don't hide your wealth
At some point, it's likely that your kids will learn about the size of your estate and how much money the family has, big or small. You should be honest and tell them at an age-appropriate time, than for them to find out much later—when there's some serious drama involved or you're on your death bed. Also, if you're uncomfortable talking about money with your kids as they grow up (and they're bound to ask questions), focus on the values or lessons you want them to learn about wealth building instead of simply hiding behind a facade of secrecy.
Don't keep the will document a secret
Let them know what you plan to leave them in your will, and explain any trusts or other legal documents that will be put into place. If they're old enough, you can even involve them in the process of creating your will. This way, there are no surprises when the time comes and they know exactly what to expect.
Involving your children in the process will also help them understand your wishes and why you've made certain decisions. It's also a good way to get feedback from them about what they would like to see happen with their inheritance.
If you have more than one child, it's also important to talk about how you're going to divide the inheritance. You don't want your kids to fight over money or property, so make sure they understand your reasoning behind your decisions.
If you find yourself unable to discuss inheritance with your kids because it makes you feel anxious or uncomfortable, try using stories as examples instead: take time to talk about how certain individuals faced similar challenges in their lives and overcame them without ever knowing exactly what they would inherit when they grew up! This can help put things into perspective. Remember: kids are curious by nature - no matter how old they are!
Make sure your kids are prepared emotionally
In addition to being prepared financially, it's important to make sure your kids are prepared emotionally for an inheritance. This is especially true if you're leaving a large sum of money or property to them.
The last thing you want is for your kids to feel guilty or resentful about their inheritance, so it's important to have a talk with them beforehand. Explain what your expectations are and why you're making the decisions you are. Let them know that you love them and that this is just part of your estate planning.
Make it a positive experience for them. Here are some tips:
Talk to your kids about money early and often. Help them understand what it is, how it works, and why it's important.
Teach them the value of delayed gratification. Help them understand that they may have to wait a long time for their inheritance, but that it will be worth it in the end.
Help them set financial goals. Teach them how to save up for things they want, so that they'll be less likely to spend their inheritance all at once.
Encourage them to be generous. Help them understand that they can use their inheritance to make the world a better place by donating to causes they care about.
Help them plan for the future. Teach them about investing and estate planning, so that they'll be able to make the most of their inheritance.
Understand that even though they may not know it yet, your kids are going to inherit something from you someday—and whether or not that inheritance is worth having depends on how well prepared they are for it at this stage in their lives (i.e., before they actually receive it).
Inheriting money can be a blessing or a curse, depending on how it's handled. If you want to ensure that your children are prepared for their inheritance, it's important to instill values that don't revolve around money and to help them develop a financial plan. By doing this, you'll set them up for success no matter what life throws their way. By following these tips, you can help ensure that your children are prepared for inheritance and that it doesn't destroy them.