The largest single financial transaction you are likely to make will be on the day you die. On that day you instantly transfer your entire accumulated net worth, to someone else. It is amazing therefore, how little thought many people put into that moment. I see people spend more time planning a child’s birthday gift than an inheritance. Some laughingly say, “It will be my kids’ problem when I die.” Unfortunately, that is often the case.
Whether your assets are large or small, figuring out how to leave them to an heir can be a challenge. Every situation is unique and there are no perfect answers. This is evidence in my own life as I review my personal estate plan several times a year. In my career I’ve seen the bad effects of too many poor decisions, or worse, too many neglected decisions regarding estate planning. Here are a few key points worth considering.
I believe there are basically two types of heirs: those who are good with money and those who are not. The first group does not need your money, and the second group will not know what to do with it. The second will often think they have won the lottery and go on a spending spree, winding up with expensive items they cannot afford to maintain and being worse off than before the inheritance. Since most inheritances are spent in less than a year, I believe estate planning with a good CFP® should largely focus on the second group.
Money can be left to heirs as a lump sum, or in a series of payments. My personal preference for most is to stretch out the inheritance over time. Payments that last for a lifetime can have a more positive effect than a chunk of money that is quickly spent. Even if it’s a small amount, it can make a difference. There is also the added benefit of the continued reminder of how much the heir was loved. I have wealthy clients who do not need the monthly checks they receive from their deceased parents’ estate, but they treasure them.
Another important aspect of estate planning is the process by which you pass on financial knowledge to your heirs, so they are better prepared to receive an inheritance. I love to see my clients use retirement funds to provide benefits to their children and grandchildren while they, the parents, are still living. Doing so builds valuable memories and has the added benefit of teaching about the value of saving, growing and wisely using money. I have found that heirs who have shared in the benefits of wise money management, tend to be better money managers themselves.
Finally, just because you have it doesn’t mean your kids should inherit it. If you love them, don’t leave an heir more money than they can wisely handle. You make these types of judgment calls every day as a parent and grandparent. Don’t abdicate the responsibility when the biggest financial day of your life arrives.
Dan Wyson, CFP® is author of “The Gold Egg," and “21 Financial Myths” and owner of Wyson Financial/Wealth Management 375 E. Riverside Dr. St. George, UT 84790 - 435-986-9525 – Securities and Advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a registered investment advisor