So you’ve been thinking. You’ve worked hard and smart and made some money. Quite a bit of it. Now it’s time to think about what to leave your children, and more importantly, how to leave it to them. One of the biggest gifts you can give your children is to give them a clear understanding of a strong work ethic. If they are handed a large sum of money, what will they do with it? At Santiago Orchard Financial, we work with you to help you think of creative ways to give your kids an inheritance without destroying their initiative to make their own mark on the world. Here are a few tips to consider:
The Age Factor
If someone wrote you a check for $100,000, and you are 20 years old, how smart would you be with that money? How much of it would you still have on your 21st birthday? Most 20 year-olds have a very “me now” kind of attitude about money and don’t see the wisdom of saving and investing it for later. So one strategy is to give their kids a small amount of money every year, and larger amounts when they reach milestone birthdays, like 30, 35, or 40.
2) Let’s Take This Idea on a Test Drive
The annual gift tax exclusion is $14,000 per year, per person. This money can be given away tax-free. So say you have 3 children and 5 grandchildren: you can gift a total of $112,000 without paying the government a penny. You can do this every year tax free under current tax law. The benefit of this approach is that you can watch and see how your kids handle the money. Are they blowing it on toys and trips? Are they saving it? Paying down debts? Investing it? You will learn much from giving them a nice gift and waiting on what happens next. Better than giving them a huge inheritance at once and seeing them squander it, while watching it kill their incentive to work and save.
3) Dangle That Carrot
You had strong inner drive to get where you are today. You know how rewarding it is to reach for a tough goal and achieve it. Another thought is to provide incentives inside of a trust, so that the child receives a chunk of it after accomplishing something worthwhile. Some parents leave a portion after a kid graduates from college, then again when obtaining a master’s degree. Just because you have a degree doesn’t mean you will be successful, but it does mean that you set goals and accomplished them. At Santiago Orchard Financial, we can help you be as creative as you want with incentivizing your kids to achieve. A common incentive is often called the “investment banker clause.” The amount of trust distributed to your child is directly tied to their income. If she makes $55,000/year, she gets that amount in trust money to match it. Now if your child is working for a non-profit and is a hard worker but doesn’t have the upward financial opportunity, you can build a contingency into that as well.
4) A Different Kind of Cash
We talked earlier about the annual federal gift exclusion, which is $14,000 per year, per person. Some parents decide to use this as a way to pay down an adult child’s student loans or mortgage. That way, your child has extra money that can be used for saving and investing.
If what to do with your kid’s inheritance is keeping you up at night, give us a call and let us walk you through some options. You want your children to benefit from your good fortune, but also be honorable and motivated people who stand on their own two financial feet.