Should You Do Anything to Prepare an Heir for a Large Inheritance?

Parents and grandparents who expect to leave a significant inheritance often spend a great deal of time deciding how the money should be divided. Less time is usually spent considering whether their heirs are prepared to manage it. When an adult child who doesn’t manage money well suddenly inherits large amounts of cash or other assets, this can cause serious problems. 

Even a financially responsible adult may have very little experience making decisions about large assets. This reality begs the question: Is there anything parents or grandparents should do to prepare an heir for a large inheritance? 

This doesn’t necessarily mean telling children exactly how much they will inherit so much as it means thinking ahead about what skills they need to have to manage the inheritance well. This can be an important part of preserving wealth from one generation to the next. Our Naperville estate planning attorney can explain more. 

How Much Should an Heir Know About a Future Inheritance?

Parents don’t need to sit down with adult children to disclose the exact amount each person will receive. Some families are comfortable doing that, but many others are not, and there can be good reasons to keep certain financial information private.

What’s more important is whether the future heir has an idea of what kind of responsibility may be coming. For example, if parents intend to bequeath a $900,000 investment portfolio, a rental property, and a share of the family business to their 30-year-old daughter, she may have no idea what to do first. This is true no matter how bright or responsible that daughter may be. 

Parents can start the conversation about inheritance without discussing specific numbers. Explain that there are meaningful assets that will eventually pass to the next generation and talk about what they hope those assets will accomplish. 

Those conversations give parents a better sense of how their children think about money. A child who is already saving aggressively, asking intelligent questions about retirement, and managing money carefully may need very little oversight. Another child may need more guidance. 

The kind of information these conversations reveal will matter when the estate plan is designed.

Large Inheritances Can Be Hard to Manage

A large inheritance creates decisions most people do not face in everyday life:

• Should money that’s invested stay invested? 
• Should a mortgage be paid off? 
• Should money be put into a separate account or mixed with a marital account? 
• Is it okay to go on a small spending spree or a vacation? 
• What happens if a sibling wants to borrow money? 
• What if a friend presents an investment opportunity that sounds promising? 

An adult who inherits a large sum of money will almost certainly need to answer one or more of these questions and none of them has an obvious answer. 

Often, an heir is making these decisions while grieving a parent. That is not an ideal time to learn how inherited retirement accounts work or how to evaluate a complicated investment.

For these reasons and more, talking to heirs and designing an estate plan that mitigates some of these concerns is a good idea. 

Should a Large Inheritance Be Given to an Heir All at Once?

Illinois law gives families considerable flexibility to use trusts as part of an estate plan. Under the Illinois Trust Code, 760 ILCS 3, a trust continues after the person who created it dies and can hold property for a beneficiary under terms established in advance.

This flexibility can be very useful when the inheritance is large enough that immediate control might create risk of bad decision-making. Consider, for example, a parent leaving $1 million to a 24-year-old child. The child may be mature and responsible, but that does not mean handing over the entire amount immediately is the best approach. A trust can allow money to be used for legitimate needs while giving the beneficiary more time to gain experience before receiving greater control.

The same idea can apply to older beneficiaries for different reasons. A 45-year-old child may have a successful career but be going through a divorce. Another child may own a business with significant creditor exposure. Another may struggle with addiction or poor financial judgment.

A trust can be drafted around those circumstances rather than treating every beneficiary exactly the same. The goal, of course, isn’t to control an adult child forever. In many cases, the trust can be designed to provide increasing access while still offering protection. 

Should an Heir Meet the Family’s Attorney or Financial Professionals?

An adult child usually shouldn’t get full access to a parent’s finances if that child may eventually inherit. However, knowing who to call with financial questions is a great place to start. If the family has worked with the same estate planning attorney, accountant, or financial professional for years, a future heir may benefit from meeting those people before there is a death in the family.

A future trustee or executor should especially understand what role he or she has been asked to take on. Few people – even those named in an estate plan – fully understand the responsibility these roles involve. 

Someone administering an estate or trust has to deal with tax filings, investment accounts, property, bills, legal documents, and more. A person can be trustworthy and intelligent and still be unprepared for that responsibility. A financial planner or family attorney who knows the family well and can advise younger generations is a great resource for heirs and executors. 

Call a Naperville, IL Estate Planning Attorney Today

A large inheritance can create opportunities for the next generation, but the estate plan should be carefully designed with the beneficiary in mind.

Gierach Law Firm helps Naperville families create estate plans that address not only who inherits, but whether additional planning and protection would be useful. A Naperville, IL estate planning attorney can help families use trusts and other planning tools to prepare heirs for significant inheritances. 

Call Gierach Law Firm at 630-756-1160 to discuss your estate plan.