Adult children – some as old as 50 – can make quite a dent in your hard-earned legacy if they come into an inheritance. Often they haven’t had the life education to understand what to do with that sort of money or they may not have the temperament to understand how to manage money. When they come into a windfall, the natural tendency might be to go and enjoy life in excess, but this can very quickly turn sour.
I once had a client who had inherited a significant amount of money from his parents. He was in his late thirties at the time and he underwent a significant transformation over the following 12 months. He dressed in the finest of clothes and was out every night enjoying the high life, spending his time in hotels, casinos and bars, paying for all his friends. Unfortunately, he was back to square one 12 months later – completely broke. He had worked his way through all of his inheritance in a very short period of time. It was tragic. A well-structured inheritance would have protected him from himself, and preserved that money over the long term.
Educate your children about your finances
There’s a lot you can do to educate your children and protect them from this scenario. The most important step is to educate them about finances. Get them involved in your estate planning early on, so that they know how to manage money. Bring them to meetings with your planner so they understand your existing situation and how important it was for you to build up your legacy over time.
I think money is less of a taboo subject now than it was perhaps 10 or 15 years ago. Overwhelmingly, most people do want to involve their adult children in their finances in this way and share information with them. You may identify at least one child who has the aptitude and maturity to understand how to manage your finances once you’re no longer here.
So in these family meetings we would start by understanding how your finances are structured – where the underlying assets are held, and how to preserve the longevity of the capital. Importantly, we discuss how that money may transition to yoru children at some point in the future. This may be through the creation of trusts or through the superannuation system.
How do you know your children are ready?
Most people aren’t interested in ruling from the grave, so you may want to allow your children to make decisions when they are mature enough. In my experience, this age has moved from around 21 to closer to 25. For some people it may be more like 30 or 35, because people tend to stay at school longer and many end up at university, where they tend to spend time doing more than one degree. So they may be around 25 or so by the time they enter the workforce. Coupled with the extraordinary price of housing, it may take a while for your children to gain some financial independence.
It’s really up to you to judge when you think your children are ready to get involved in your finances.
Structures can help you protect your legacy
If you’re not sure about the process, you can structure your finances to ensure your children don’t blow the lot in a short period of time. You can set up their inheritance in a way that protects them from themselves, by putting structures in place to protect the capital – in other words, making sure that the money lasts as long as possible for those it was meant for.
Trusts can be used as a way to control how your children can access their inheritance. You can set up a trust and put some rules and regulations into a trust deed to set out what can and can’t happen to your money after you are gone. Your spendthrift children can then be allocated a monthly or weekly allowance without touching the capital.
Some trust deeds place restrictions on capital for many years so your children will get to enjoy the benefits of the income generated by that portfolio, while being unable to unwind it. You can leave instructions governing who should provide advice on that money – the relevant lawyers, accountants and trustees. These are the people who will be charged with ensuring compliance with the rules of the trust deed and overseeing the processes in place. This can even be tailored to your individual family circumstances.
You may even feel the need to ensure that your children’s partner, for example, can’t access the money. To do this, you can use a discretionary or bloodline trust to ensure that distributions can only be made to a son or daughter and their family can only use that money while they’re married or in a relationship. Once the relationship ceases, you can use a discretionary mechanism to halt the flow of money to your child’s (ex) partner.
It’s very difficult to put an old head on young – and even not-so-young – shoulders. But you can help give your adult children a bit of an apprenticeship as you get older, which save them a lot of financial pain and hardship in the long run.
Jason King is an Executive Advisor at Viridian Advisory
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