5 Tips to Help Adult Children Prepare for Their Inheritance
One in three Americans who receive an inheritance spends it within two years. Discuss your estate before it's too late.
You’ve worked hard to accumulate an estate that you hope to pass on to your children, but have you talked to them about it? If the answer is no, you’re not alone. More than 40% of parents with investable assets of $1 million or more haven’t told their children about their estate plans, a CNBC survey found.
Some reluctant parents are concerned that their children could feel entitled and less motivated to achieve on their own. Others worry that a child will depend on an inheritance that may not in fact materialize.
But failing to talk about estates can create other risks. Uninformed children are often unprepared to handle sudden income. In fact, one in three Americans who receive an inheritance spends it all within two years, according to a study conducted by Jay Zagorsky, an economist and research scientist at Ohio State University.
“People who dismiss the inheritance conversation should think twice,” says Howard Hook, a CPA and a certified financial planner with EKS Associates. “Most people want their assets to be preserved after they’re gone. Having the right conversation can help your money last.”
Revealing at least some details of your estate can help your children plan ahead and make informed financial decisions. When you’re ready to have the inheritance talk with your adult children, these tips could help:
1. Craft a Family Mission Statement
Before you start the discussion, think about the financial values that matter most to you. Do you want your children to be charitable? Self-sufficient? Is education a priority? Write down your values and share them with your children.
Talk about your own life and the factors that led to your wealth, such as hard work, disciplined spending or sound investing. This exchange can help the next generation understand that the estate didn’t just happen by luck, and that they are being entrusted with handling it responsibly.
2. Take It Slow
Having a series of conversations about inheritance enables you to disclose information over time, based on each child’s life stage and level of experience managing wealth.
If your estate is complex — say it includes investments such as real estate, individual stocks, mutual funds or business ownership — it could be worthwhile to take some time to educate your children about your holdings.
“Have periodic check-ins,” says Erika Safran, founder of Safran Wealth Advisors. “Parents should use their good judgment and share information that matches the responsibility and maturity of their children.”
3. Explain Your Actions
Explaining your estate-planning decisions can help prevent confusion and controversy among your heirs.
For instance, you may have reason to provide more for some children than others. Perhaps you’ve set up a trust that makes distributions over time to prevent a less mature child from squandering his or her inheritance. Your children may be better able to accept these difficult decisions if you explain your rationale. “It’s much better to explain why you did what you did than have your children resent you — and resent each other — after you’re gone,” says David Mendels, director of planning at Creative Financial Concepts.
4. Listen to Your Children
Give your children an opportunity to voice their thoughts. Let them ask questions and communicate their own wishes, without passing judgment. Keeping your tone positive, rather than preaching, can help convey that you have their best interests in mind.
“You don’t want to say, ‘I worked hard; don’t squander this,’” Hook says. “You do want to say, ‘We want this money to be there for you and your children.’”
5. Bring Professionals Into the Conversation
Including an estate planning attorney, financial advisor or accountant in your discussion shows your children that you carefully evaluated the decisions you made. A professional can also help answer any questions from family members.
Young adults in particular might benefit from meeting with a financial advisor to prepare for the emotional and financial challenges of managing future wealth. Hook has found the children of his clients have been receptive to money discussions. “Nine times out of 10, they’re very eager to have a conversation,” he says.
The important thing is to start the inheritance conversation and to keep talking. It’s one way to help ensure your legacy lives on through future generations.