Estate Planning Essentials Part 1: Take Time to Prepare the Heir - Rodgers & Associates

Estate Planning Essentials Part 1: Take Time to Prepare the Heir

Other posts in this 3-part series: Part 2, Part 3

Estate planning is not easy. The process mechanics can be easy enough, but the big picture of how to disperse assets requires a lot of thought and soul searching.

Those that have acquired a sizable estate should think about the impli­ca­tions of leaving assets to children or grand­children in a way that is prudent and will not ultimately cause them harm.

Financial planners are well acquainted with the problems that sudden wealth can create. Statistics on lottery winners show that 70% of them squander away their winnings in just a few years and are left in worse financial shape than before they won1. Other studies show that when new wealth is created in a family, there is a 90% proba­bility that it will all be gone by the third gener­ation2. This is not the kind of legacy anyone wants to leave for the family.

Being the recipient of a large amount of unexpected money may not automat­i­cally be a good thing. It ranks very high on the list of stressful situa­tions a person or family can encounter and, depending on where the money comes from; there can be a great deal of guilt or regret attached to it. In the case of inherited wealth, people often stress over how to invest it “I don’t want to lose any of Dad’s money” or “These are the invest­ments Mom chose, and I don’t want to change them” even though they may not be performing well. I have found that children who inherit a parent’s portfolio are reluctant to change the portfolio, even when it is not suitable for them.

How much should you leave the kids?

The question of how much to leave the kids is a highly subjective matter. Of 30 multi­mil­lion­aires recently surveyed by Fortune Magazine, six say their children will be better off with only minimal inher­i­tances. Almost half plan to leave at least as much to charity as to their heirs3. Should the money be left to children outright or in a trust? Some parents want to ensure that

their heirs lead productive lives before they get a share of the estate. Their will might establish trusts for each child — a sound estate-planning practice that can prevent the child from becoming a spend­thrift and protect the assets in a divorce. Most estate advisers believe that 21, the age of majority, is too early for most children to inherit money. A prudent trust distri­b­ution scenario could start paying interest at age 35 and then allow access to principal in two install­ments at 40 and 45.

The best strategy may be to educate your children about money and wealth and how to handle it as the ultimate safeguard against potential problems. Don’t think that you can pass the money on and hope that in doing so, you also pass on your values – teach them how to use wealth, the life to lead, the standards to have. Put child-rearing before estate planning.

The education process can begin with annual gifting. In 2021, this annual gift exclusion is $15,000 per recipient. Any amount you give over $15,000 per recipient is subject to gift tax, or it can be subtracted from the lifetime amount that can be trans­ferred tax-free at death. Some people think that if you give a certain amount of money to someone else, the recipient pays income tax on it. This is not true. The gift is not subject to income tax.

Parents should observe how children handle money gifted to them. Do they save it, use it to fund their retirement accounts, pay down their mortgage, or go on a shopping spree? Over time, do they come to expect the gift and count on it as part of their budget? We know instances where children would run up credit card debt in antic­i­pation of an annual gift from parents. Encourage children to enroll in a personal finance class to learn budgeting and debt management. Adjust­ments to the estate plan may be needed when heirs are unwilling to invest the time to improve money management skills.

Finally, it may be helpful if family finances are disclosed and discussed with heirs long before it becomes an inher­i­tance. It is important for heirs to know how the assets were earned and accumu­lated. This would be the time to let them know why they are getting some of it (if part of it is going to charity) or why restric­tions have been placed on the disbursement. These talks can evolve into full-scale sessions on the family finances and values. It can also help eliminate problems between siblings to avoid the perception that an heir is not being treated equally.

Ultimately, we believe the best strategy to avoid creating problems from your inher­i­tance is to teach your heirs to be respon­sible money managers while you are still living.


  • Estate planning requires careful thought. Leaving heirs a lot of money without preparing them first is not neces­sarily a good idea.
  • Consider distrib­uting the estate in portions when heirs reach a certain age.
  • Educate children and grand­children about how to handle money and wealth through annual gifting.
  1. Why do 70 percent of lottery winners end up bankrupt? Cleveland​.com, January 11, 2019 
  2. Avoid the Traps That Can Destroy Family Businesses. Harvard Business Review 
  3. Should you leave it all to the children? Fortune Magazine