Leaving Wealth to your Heirs? Some Items to Consider.

Estate planning offers many opportunities. It allows clients to pass on assets and values to loved ones, support charities they care about, reduce estate taxes, plan for disability and leave a legacy. In my experience in guiding clients through the estate planning process, one of the items that they often wrestle with is the distribution provisions to be included in their documents – how much is enough? How much is too much? When and for what purpose can they access assets? Can I protect the wealth for future generations? How can we pass on assets so that they enrich the lives of our heirs? 

There are numerous ways of distributing an estate and what works for one family doesn’t necessarily work for another. While every situation is unique, there are general guidelines that can be provided to clients to support them in making a decision.  Depending on their goals, documents can be crafted to be very specific, with detailed guidelines on how, when and for what purpose assets can be distributed. On the other hand, they can be very liberal or decisions could be left entirely to a trustee’s discretion.  Here are some options to consider: 

  • Leave assets outright: this is a “no strings attached” approach where wealth is passed on upon death with no restrictions. This is likely the simplest and least controlling approach to take. However, for families of significant wealth this could have some drawbacks such as the limited ability and experience heirs have to manage a large lump sum payment, outside risks like a divorcing spouse or a high-risk profession, concerns around demotivating heirs to live off their inheritance rather than become productive on their own. Given this, distributing large amounts of wealth at relatively young ages is generally discouraged. 
  • Distributing trust assets in stages: another option is to hold the beneficiary’s inheritance in a trust and pay the beneficiary one or more lump sums in stages – in other words when the beneficiary reaches a certain age or achieves a specific goal, they will receive an outright distribution of all or part of their inheritance.  There could be many variations to this and some examples are given below: 
    • Pay certain percentages amounts of the trust when the beneficiary reaches a certain age. e.g. 10% at age 30, 30% at age 35 and so on. 
    • Provide incentives for heirs to reach certain goals that are important to you or to them. e.g. 10% when he/she attains a Bachelors’ degree; 20% for a Master’s degree; match a percentage of earned income etc. 

The advantage of this method is that it allows heirs to “test the waters” in managing their wealth without putting all their inheritance at risk at once. 

  • Leaving assets in a discretionary lifetime trust: this option would maintain the assets in a trust for the entire lifetime of the heirs. Drafted properly, this offers the highest level of protection from divorcing spouses, lawsuits, and a beneficiary’s poor decisions and outside influences. In addition, this also provides the opportunity to create a lasting family legacy for future generations. The downside of this is that beneficiaries will need to rely on the trustee’s discretion to make distributions, which at times could prove frustrating, however, this could be addressed to a certain degree if specific instructions are given in the trust for certain types of distributions such as providing a 20% down payment for a home, supporting business ventures or paying for higher education.  
  • A combination: a blend of (b) and (c) above would allow a middle ground where beneficiaries would receive a certain amount or percentage of their inheritance at death or at a certain age and leave the balance in trust in perpetuity. An example of this would be to distribute $1,000,000 upon the second death of the second spouse and hold the remaining wealth in trust. This will allow heirs full access to a certain amount of money to support their lifestyle while pursuing their own ambitions without being wholly reliant on the trust.   

There is no right or wrong answer and the way someone distributes his / her estate is dependent on their personal and family situation, values, and goals.