Financial Education

Estate Planning: How To Prepare Your Family For Their Inheritance

Reading time: 5 Minutes

March 14th, 2019

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As you get closer to retirement, it's time to put a plan in place to ensure a smooth transition when it comes to passing on your estate to your family and loved ones. It's important to have your team in place to help plan your estate. This team can include your estate attorney, your CPA and your financial advisor. Also important, and sometimes the most challenging aspect of estate planning, is the conversation you need to have with your loved ones to make sure they understand your wishes and are prepared to carry them out.

It might be awkward or emotional to talk about what happens after you die, but you don't want to leave these matters solely to your family and attorneys to deal with, because it can quickly become an expensive, conflicted situation.

Here are a few tips for successfully preparing your family to receive the estate you'll be passing along.

1. Decide on your estate planning priorities.

You get to dictate exactly how you pass along your wealth. But to do that, you'll need to think things through first. The actual planning part can be as simple or complicated as it needs to be, but it starts with figuring out what you want to accomplish with your estate plan. Maybe it's providing for your children's (or grandchildren's) college funds, maybe it's creating a charitable organization after your passing, maybe it's just to avoid the cost and hassle of probate court. Your team can walk you through the thought process, and help make sure your estate plan will do what you want. Then you'll be able to walk your loved ones through a plan that has been fully fleshed out.

2. Take an honest look at your beneficiaries.

As you think about your estate plan, leaving assets to your loved ones comes with some risk. Will the money do them more harm then good? Are they ready to responsibly receive what you are leaving to them?

Before designating someone as your beneficiary, think about how capable they are of shouldering the responsibility of the assets you want to bequeath them. This is the time to consider any critical character details and how they might come into play. If an individual has creditor issues or any substance abuse habits or a propensity towards divorce, these are all situations you'll want to plan around. For beneficiaries with little experience at budgeting their own funds, assets may need to be retained in trust for their own protection.

At the other end of the spectrum, second-generation family members who are already financially successful in their own right might not even need to have assets given to them outright. It may be more tax advantageous to pass your inheritance to the grandchildren instead. There are no black-and-white answers here; the best solution will really depend on the relationships between the parents and the children and the personalities involved.


3. Talk it out—but at the right time.

It's important to walk your loved ones through your plan, explaining why you set things up the way you did, and answering any questions they have. That being said, timing is everything and it may be a good idea to think twice about having explicit conversations about inheritance too early.

This might sound counterintuitive—after all, isn't it better to plan everything far in advance? But, in the case of wealthy parents who plan to leave everything to their children, it's possible that if the kids catch wind of that too early, it may sap their motivation to be productive citizens of society. We probably all have encountered people who never had to get a job and have no experience in the working world, resulting in a lack of appreciation for their wealth.

This doesn't mean you can't start preparing your heirs early. Teach your children and grandchildren from a young age about the importance (and difficulty) of earning money and using it responsibly. This will be crucial if their future includes a large estate, or a family-owned business.

4. Don't wait till the last minute to plan your business succession.

When there's a family business involved, it's important to plan out how exactly the handover will work when you're no longer able to lead the company. Will there be someone willing and prepared to take the reins? The first question to ask is: Does my child show any interest in being part of the business? Then, as a followup: Does my child have the natural ability or skills to contribute to the business?

Even if your child is interested and has aptitude, it will likely take years of experience on the job to properly train them for success. Planning out the ramp-up of responsibility is crucial. And if the second, third, or even fourth generations aren't able to realistically run the company, you may have to consider selling the business or closing down.

Another complication may arise in the form of multiple siblings and determining who, if any, owns what part of the company. If multiple siblings have ownership interests in a business—and then each sibling has two or three kids—at some point, the company may not be able to reasonably provide for all the owners. It's important to define how ownership will be shared among the family, so everyone has reasonable expectations and is clear on who will get what, both in terms of assets and responsibilities.

As you can see, there are a lot of nuances involved in preparing your heirs for their inheritance. Depending on the complexity of one's assets and estate plans, a trust services advisor can provide considerable help and peace of mind. After all, you want to make sure you're providing the best possible future for your family and loved ones—it's worth starting to talk about it now.

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