Will your Kids Blow their Inheritance?

For most people who spend a lifetime prudently managing their wealth and their spending habits, the thought of their children recklessly and rapidly blowing their inheritance is disconcerting. According to a study by the National Endowment for Financial Education, 70 percent of all people who suddenly receive a large sum of money will use it all within a few years. According to behavioral scientists, although people tend to be frugal with money that is earmarked for a specific purpose such as a child’s education, they are much more reckless with unexpected windfalls like an inheritance or lottery winnings.

As a parent, you probably already have a good idea if your children are likely to be responsible with the money they inherit from you. If your heirs have built up a considerable net worth on their own, you are probably not too worried about them. However, if your grown kids are still coming to you for financial support, there may be an issue.

One way to prevent your kids from blowing their inheritance is to create a trust for them that appoints an independent trustee to help them manage their finances. Your kids can typically receive all the income generated by their inheritance each year, but they can only access the principal for specific purposes such as health care, education or emergency situations.

You can choose to direct the trustee to distribute some or all of the assets to your children once they reach a certain age. However, I usually don’t recommend this because if you are concerned about your kids blowing their inheritance, why allow them to blow it once they reach a certain age? As for annuities and IRAs, if you are trying to prevent your children from squandering those assets, you can name your trust as the beneficiary for those accounts. However, there may be some adverse tax consequences for naming your trust as the beneficiary of those assets, so you should consult with your tax adviser prior to doing so.