When should your children get their inheritance?

You’ve worked hard in your career, saved well and invested wisely. As you get older, you start thinking about estate planning and transferring your wealth to the next generation. How can you tell if your children are ready to handle an inheritance responsibly? Here are some basic age guidelines to consider, but of course, it’s more complicated than that, and each person’s situation is unique.

One of my clients was leaving $2 million to his three adult children and had to decide when each of them would receive a portion—or all—of their inheritance. It’s a common challenge for parents.

The oldest child, in his mid-50s, received his full share immediately after his father passed away. However, the other two children were in their late 30s and were treated differently. Their inheritance was kept in a trust, with one-third to be given to them at age 45, the next one-third at 50 and the remainder when they turned 55.

The father’s intention was to treat the two young heirs fairly—and to protect them from spending their share unwisely. His instincts were on the money.

One of the children, a son, was not financially responsible, could not hold a job and had several failed marriages. He called regularly, asking for money from his trust simply to pay his bills. Fortunately, he was able to keep a roof over his head and feed his children because of his father’s decision to distribute the funds over a long period instead of one lump sum at his death.

The younger daughter, however, had a good job and saved money in a 401(k) retirement savings plan. She never needed to withdraw any money from her trust, only needing those funds to pay the accounting and tax fees to maintain the trust. So, when she reached ages 45, 50 and 55, she had plenty of money available to care for her family and enjoy life.

As the saying goes, “Love your children equally, but treat them uniquely.” That axiom is also true with inheritance planning.

When a person is drawing up or revising their will, it’s common to consider how to structure their inheritance payments to children. If their nest egg has grown nicely over many years, the size of an inheritance only raises more questions about how to distribute it—all at once or in smaller portions over a period of time.

Given this backdrop, here are some inheritance strategies to consider:

Children up to age 12

Consider setting up either a lifetime trust or a trust that will last until they are in their mid- to late 40s. With children of this age, the person or entity you name as trustee to oversee the money is extremely important because the young child is totally reliant upon an adult steering them in the right direction. It’s also too soon to tell whether your child will turn out to be financially astute or if money will easily burn a hole in their pocket. A trust protects the child’s inheritance until they have a better understanding of how to manage money and manage themselves. A trust can also provide some protection for children against a failed marriage and help financially support them if they choose an occupation that may not pay well.

Teenagers/Children entering college

At this point, you can better understand a child’s maturity level and direction in life. I believe, it's still a good idea to leave most, if not all, of a child’s inheritance in a trust until they are at least out of college, if not longer. This strategy provides a deterrent to excess spending, such as large parties and vacations with friends or expensive sports cars. And it can help derail any thoughts about leaving college and not graduating. You want your children to be disciplined and self-motivated. At this age, I would still consider setting up a lifetime trust or one where the inheritance will remain in trust until their mid- to late 40s. The trust can provide periodic disbursements to start a new business, buy a house, supplement monthly income needs, etc.

College graduate but not yet financially independent

See the recommendation directly above, as the rationale is essentially the same.

Mature young adults, especially those with a family

At this point, the adult child likely has a strong sense of independence, is more financially stable and may even have their own financial or professional advisor. Consider giving the child some money outright, perhaps 25% to 50%, depending on the size of their potential inheritance. This could come in handy to help your child pay family expenses like private school tuition or put an addition on their house or make it a little easier to make ends meet each month. However, the larger the inheritance, the longer I recommend that it remains in a trust to protect against potential divorce, creditors or wasteful tendencies.

Child reaches mid-life

As your child turns roughly 40 to 45 years old, giving them their full inheritance can be the better move. It’s a simplified estate plan and less costly to manage, and there may no longer be a need for the benefits of a trust that I’ve mentioned. There are always some exceptions to keep in mind, of course. For example, if your child works in a profession where they may be sued, such as a medical doctor, or if they have a choppy marriage, you may want to continue to keep some or all of their inheritance in a trust. Plus, you never know what can happen in the future, and money held in trust could serve as a protective barrier against an unforeseen financial catastrophe.

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