Most parents spend years thinking about how to provide for their children. They save, invest, build businesses, buy homes, and make countless financial decisions, hoping what they leave behind will give the next generation greater security.
But one important question is easy to overlook: How should your children receive their inheritance?
It is natural to assume that leaving money or property directly to your children is the simplest and most generous approach. Unfortunately, an outright inheritance can expose those assets to circumstances your family cannot predict.
An outright inheritance means your child personally owns the assets and can potentially lose them. Divorce, lawsuits, bankruptcy, poor financial decisions, or other unexpected circumstances can put years of careful planning at risk.
Here are five reasons to think carefully before leaving an inheritance outright.
Divorce Can Put an Inheritance at Risk
Imagine leaving your daughter a substantial inheritance, believing you have created a lasting financial foundation for her. Years later, she divorces.
Depending on the circumstances and applicable law, inherited assets can become entangled in marital-property disputes, particularly if they have been commingled with marital assets. What you intended to benefit your child could ultimately become part of a difficult financial negotiation.
You worked to provide for your child. Naturally, you want that inheritance to benefit your child rather than unintentionally becoming a resource for a future former spouse.
Planning ahead can provide additional protection.
Debt and Bankruptcy Can Change Everything
Good people can experience serious financial problems.
A business venture may fail. A major accident or illness may result in substantial expenses. Someone may simply make a series of financial decisions that eventually become overwhelming.
If your child personally owns an inherited asset, that inheritance may be exposed to creditors or other financial claims.
The important point is not that your child will necessarily experience financial trouble. You can't predict every circumstance your child will face decades from now.
Estate planning can account for that uncertainty.
Lawsuits Can Put Assets at Risk
A lawsuit can arise from circumstances that no one intended.
A car accident, an injury on someone’s property, or another unexpected event can create significant financial liability. Even responsible people can face claims they never anticipated.
If an inheritance is owned outright by your child, those assets may be vulnerable.
We’ve seen examples of substantial judgments resulting from accidents and other claims, as well as a personal example involving significant property damage caused by an accidental flood.
The lesson is simple: sometimes circumstances outside your child’s control can create financial risks.
Mismanagement Can Defeat Good Intentions
Parents also know their children better than anyone.
One child may be an excellent money manager. Another may be impulsive with money, easily influenced by others, or uncomfortable making investment decisions.
An inheritance can be substantial enough to change someone’s financial life, but receiving a large sum does not automatically make someone an experienced steward of wealth.
The original source cites research suggesting that some inheritors spend or lose substantial portions of their inheritance.
Rather than simply handing over the assets, parents can consider creating a structure that provides financial protection while still allowing the child meaningful control.
An Inheritance Can Affect More Than Finances
Another concern is less tangible but equally important: what a large inheritance can do to a person’s motivation, identity, and sense of responsibility.
We’ve seen inheritors experiencing excessive spending, identity challenges, guilt, and other difficulties after receiving significant wealth.
The goal of estate planning should not simply be to transfer as much as possible as quickly as possible. It should be to transfer wealth in a way that supports the people you love.
Consider a Lifetime Asset Protection Trust
One alternative to an outright inheritance is a Lifetime Asset Protection Trust.
With this type of structure, the trust owns the inherited assets rather than the child personally owning them. Depending on how the trust is drafted and the applicable law, this can provide an additional layer of protection from risks such as divorce, bankruptcy, and lawsuits.
A carefully designed trust can also be structured to encourage financial responsibility. Your child may have opportunities to participate in managing the trust, learn about investing and giving, and exercise meaningful control without necessarily holding the assets in their individual name.
The right structure depends on your family, your assets, and your goals.
Ultimately, estate planning is not just about deciding who gets what. It is about deciding how the people you love will receive what you worked so hard to build.
A thoughtful inheritance plan can help protect your family’s wealth while giving the next generation an opportunity to use it wisely.
Schedule a 15-minute discovery call to learn how your estate plan can provide a more thoughtful structure for the people you love.
This article is a service of Gookin Law, a Personal Family Lawyer® Firm. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Family Wealth Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love.
The content is sourced from Personal Family Lawyer® for use by Personal Family Lawyer® firms, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own, separate from this educational material.