How to Discuss Inheritance with Your Children
It can be uncomfortable to talk to your children about their inheritance. While you don’t have to tell your children exactly how much they will inherit, it is a good idea to have a conversation with them about what to do with an inheritance. If your children are unprepared, they can easily make some financial planning mistakes. At Phelps LaClair, we help Arizona families plan for their children’s inheritance. We put together this guide to help you understand why and how you should discuss the topic of inheritance with your children.
A Guide to Children’s Inheritance
Why Should You Talk to Your Children About Their Inheritance?
Some people avoid the topic of inheritance out of fear that their children will lose the motivation to earn their own incomes. Although it’s important to teach your children how to be productive and provide for themselves, it’s equally important to teach them financial responsibility. That includes teaching them what to do with an inheritance when they receive one, whether it’s from you, their grandparents, aunts or uncles, etc.
When Should You Discuss Your Children’s Inheritance?
Age ten is a good time to start talking to your children about financial planning and to bring up the topic of your estate plan. You don’t need to go into specifics when it comes to your wealth, but it’s a good idea to teach them about your values and the importance of responsible spending.
By their late teens or early twenties, your children should be able to understand the complexities of financial planning. It’s good to have a serious discussion about any details of your estate plan that you wish to share, such as how much they will receive, how they will receive it, which possessions they will inherit, etc., so they can be prepared.
It’s especially important to talk to your children about financial and estate planning by the time they move out and start building their own family wealth. Whether or not you wish to disclose exactly how much they will inherit, it’s essential that they understand what to do and what not to do with an inheritance. For example, they should not try to hold onto inherited real estate that they can’t afford to maintain.
Don’t put off discussing inheritance with your children. The sooner you talk about wealth with your children, the better off they will be as adults. It also helps to get your family comfortable with talking about difficult topics like estate planning, so that you can discuss any changes you make together.
Talking about estate planning with your children, parents, and siblings ensures that no one gets blindsided with unexpected roles to fill, like executor or power of attorney, or by any other aspects of your estate plan.
How to Talk to Your Children About Their Inheritance
If you’re not sure how to get a conversation about your children’s inheritance started, sometimes it helps to share an anecdote about a recent conversation you had or some news you heard recently about inheritances. For instance, did you know that Shaquille O’Neal wants his children to earn two degrees before they can inherit his wealth?
When you do talk about estate planning with your children, follow these inheritance etiquette tips to ensure a smooth, successful conversation:
You should always be forthcoming about your final wishes. When determining inheritances, it’s best to divide your assets as equally as possible. However, that may not always be practical, depending on the situation. If you plan to leave a larger inheritance to one of your children because they have special needs, are significantly younger than their siblings, or for any other reason, it’s important to discuss it with your other children to prevent tension between them in the future.
Keep the Focus on Financial Responsibility
It can be overwhelming for children to talk about what’s going to happen after a parent’s death. Keep the focus on financial responsibility rather than your eventual death by avoiding phrases like “when I’m gone,” “after I die,” etc., Instead explain how to handle an inheritance using phrases like “when you suddenly receive money” or “when someone gifts you money.” This will help your child better retain the concept of being responsible with their inherited wealth, rather than letting them dwell on the possibility of your death.
Share Your Values and Experience
The best way to encourage financial responsibility is to communicate your values and share your own experiences with managing wealth. Discuss what money means to you and how you came to earn your own wealth. Share how you make your investment decisions and how you discipline your spending habits. Let your children know whether you donate to nonprofit organizations, or if you plan to leave a portion of your estate to charity in a trust. If you own a business, explain how you run it and what your plans are for transferring ownership.
Three Ways to Leave an Inheritance to Your Children
There are plenty of options for leaving money and other assets to your children. No matter which options you choose, make sure to inform your children of the details, so they know what to expect when the time comes.
One way to leave an inheritance to your children is by naming them in your will. Make sure to name each child individually and add any new children that join the family to ensure that no one gets left out. Simply saying “I leave my estate to my children” is too vague and can prevent stepchildren from inheriting assets despite your wishes. You should also be as specific as possible about how you wish to divide your estate between your children, in order to avoid any confusion.
Another option is to create a trust for each of your children. A trust protects your children’s assets until they turn 18, graduate college, or meet another requirement of your choice. While a will transfers children’s inheritance all at once, a trust gives you the option to distribute your assets to your children in a series of installments every few years. If you choose to create a trust, make sure to leave detailed instructions for the trustee about your wishes.
3: Cash Gifts
If you wish to give your children an inheritance while you’re still alive, you can make cash gifts over time. In 2022, you can gift up to $16,000, tax-free. This annual exclusion applies to each gift, meaning each child can receive up to $16,000 from you this year without you needing to pay the gift tax.
Family Estate Planning Lawyer in Mesa and Chandler
If you need any help with your estate plan, including tips on how to discuss inheritance with your children or other family members, the team at Phelps LaClair can help. We’ve been assisting Arizona families with inheritance planning for over 40 years. Call us at 480-892-2488 today to schedule a free consultation.