You’ve worked hard your entire life to be able to leave a legacy for your children and grandchildren. Now, it’s time to make sure your wealth is protected so that it doesn’t fall into the wrong hands.
Below, we’ll break down five protections to consider putting in place to ensure your family is taken care of and that your wealth is distributed according to your wishes.
How To Protect an Inheritance
The protections to consider incorporating into your estate planning depend on several factors such as:
- Your children’s age
- Your children’s financial maturity level
- The value of your estate
- Your children’s marital status
- Your specific feelings and beliefs about leaving an inheritance
Name a Legal Guardian
The most important protection for parents with young children is naming a legal guardian in your last will and testament. The person named will be your children’s legal guardian in the event you pass away before your children reach adulthood. A guardianship designation allows you to name a guardian who shares your parental values and can provide comfort and emotional stability to your children.
It can be unimaginable for parents to think about someone else raising their children (which is why many people avoid thinking about it and delay naming a guardian). Though this is a difficult topic to think about, naming a legal guardian is one of the best ways to protect your children.
Even though the actuarial tables say that you have a life expectancy of several decades, it’s essential to have a plan in place in case of the unexpected. The care of your children is a decision that’s too important to leave up to anyone else.
Establish a Trust
The second protection you should consider for your children and grandchildren is establishing a trust. This option is beneficial if you are concerned your heirs will blow their inheritance if they receive it all at once. When you create a trust, the person you designate as the trustee is responsible for distributing your wealth according to the directions in the trust documents.
While some parents decide to give the inheritance all at once, others are more comfortable splitting up the payments in an effort to prevent mismanagement and overspending. Creating a trust is a way to eliminate this risk, as it allows you to specify how and when your heirs receive their inheritance. For example, instead of having your heirs receive the money in one lump sum, you can distribute it over time according to a timeline of your choosing.
You have several options regarding when your children or grandchildren can receive their inheritance. For example, many people like the idea of leaving an inheritance in stages, such as choosing to distribute the estate in equal installments when their children or grandchildren turn ages 25, 30, and 35. That way, if they mismanage the first payment, they still have three more chances to handle things more responsibly.
Another option is to give the trustee the discretion to determine when your children or grandchildren get their inheritance. This might be appropriate if you have no idea when your child or grandchild will be ready to manage a large sum of money.
Divorce-Proof the Inheritance
There may be nothing worse for a parent that works and saves their entire life to leave an inheritance for their child, only to have their child go through a divorce and lose half of it to their ex-spouse. Therefore, the next protection to consider involves how to shield your child’s inheritance from their spouse. By divorce-proofing your child’s inheritance, you ensure your wealth stays in the hands of your child regardless of their marital status.
Making an inheritance divorce-proof for your child typically involves putting their inheritance into a trust for their benefit. Doing so ensures their inheritance does not get commingled with other assets that the child owns with their spouse. Another critical way to protect your assets is to encourage your children to create and sign pre-nuptial agreements.
Leave a Smaller Inheritance
The fourth protection to consider is leaving a smaller inheritance to your descendants. Though it may seem counterintuitive, some parents feel they aren’t doing their children any favors by leaving them a large legacy. Some parents think that leaving a large estate for their children and grandchildren may squash their ambition and work ethic.
If you feel this way, distributing the inheritance over time is one way to manage the risk. Still, you may also want to consider limiting the amounts set aside for your children and grandchildren and providing more for charities, or other causes that you know can make your community or the world a better place. That way, you get to make a positive impact and don’t have to worry that a large inheritance will adversely affect your children’s or grandchildren’s drive and life choices.
Name the Right Advocates
Another way to protect your heirs is to choose the right advocates to carry out the wishes of your estate plan—such as your executors, successor trustees of your living trust, power of attorney agents, and health care decision-makers.
Every family has its own dynamics based on the relationships of all family members. You can protect all of your descendants by carefully considering who will handle your money, who talks to your doctors, and who can make decisions on your behalf.
Make sure you designate trustworthy, reliable people to carry out your wishes swiftly and accurately to avoid costly legal battles and protect your descendants.
You’ve worked too hard to leave your legacy unprotected. Fortunately, you can ensure your descendants are taken care of and safeguard their inheritance with proper estate planning, such as designating a guardian for minor children, establishing trusts, divorce-proofing the inheritance, and naming the right advocates.
Do you have the right protections in place to ensure your wealth doesn’t fall into the wrong hands? Take our free estate planning assessment to determine if you have the proper estate plan documents for your specific situation.