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When Children Receive Large Inheritances

It is not that uncommon for relatively younger children to receive large sums of money and property from their parents’ estate.  This may or may not be a good idea in some situations.

 

If both parents or a surviving parent dies, what kind of restrictions should be placed on an inheritance?  The question is more acute if a child has demonstrated unstable behavior in the past such as alcoholism, drugs, recklessness or unmindful spending.  Even if the behavior is not that acute, you wonder if an 18 or 22 year-old will burn through an inheritance in a few years or less.

The answer is even more straightforward when a child is very young. Whatever inheritance is left for the child, it can be placed in a trust and administered by a trustee for the well-being of that child. The trustee will invest and administer the inheritance funds and will use them for the child’s needs and education. After that, there may be some limitations on how much is given to the child and when.

If a child is older, say in their teens or early twenties, chances are you can earmark a portion of the inheritance for education and specify specific ages for other distributions. These kinds of instructions can be placed into a trust and it is very common to see these clauses. Typically, trusts have language giving a child one-third of their inheritance when they reach 21 years old, one-third at age 25 and the final third at age 30.  Another common disbursement is to specify 25% at age 18, 25% at age 25, 25% at age 30 and the rest at age 35. Usually a trustee will oversee the funds and make the distributions to the child. Typically, trustees have a lot of discretion.

It is also possible to layer a trust with other limitations and restrictions on the inheritance. One can condition distributions based on completing college or getting a reputable job.  Another distribution condition can be that the child receives interest only while the trustee manages and invests principal for a period of years. If there is real estate, provisions can be made to not sell the real estate but to make it an income producing enterprise for the beneficiary. Some of these limitations may seem draconian but a parent understandably does not want to see a $2 million or more estate used to support someone who refuses to go to college or get a steady job.

A trust could also set up a future trust so at age 26, for example, an inheritance would go into the child’s own separate trust and have protections from things like divorce, creditors and predators.

Parents who have questions about inheritances and the kind of limitations they can place in a trust should consult with their estate planning attorney to discuss these and possibly other options for beneficiaries.

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Walnut Creek, CA 94597

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