LEGAL READ: Will The Kids Be Happy with the Inheritance Jackpot?

LEGAL READ: Will The Kids Be Happy with the Inheritance Jackpot?

INTRO: In our area, many people have sizable estates. Consequently, when they die and their children (or other loved ones) receive an inheritance, it can be analogous to hitting the jackpot.

A primary goal of most clients – aside from important objectives – such as avoiding unnecessary taxes and estate administration costs – is to help make their children comfortable. Many say: “I just want my kids to be happy”. This begs the question: “Will the receipt of a substantial inheritance make the children happy?” The answer is “of course”, right?

Interestingly, when looking at lottery winners, the happiness answer is not so clear. In a Wall St. Journal article from several years ago, the author wrote about “America’s Dangerous Powerball Economy”. He cited a famous 1978 study that found that after an initial “happiness boost” right after winning the lottery, within a few months the winners’ happiness had receded to a pre-lottery winning level. As more time passed, the winners were actually less happy than they had been before winning.

The author rightfully points out that it would be misguided to conclude that money makes us unhappy. Rather, he refers to voluminous research demonstrating that money, when earned, is typically associated positively with happiness; but, conversely,when it is unearned and raw purchasing power is untethered from hard work and merit, people are much less likely to be happy and feel successful.

These findings and principles are consistent with anecdotal evidence and my 22 years of experience helping people plan and administer their estates. During the planning process, it can help to ask clients about the legacy they wish to leave. A fascinating question is “How much is too much to leave your children (or other loved ones)?” For some, the answer is $1 Million; for others, it might be significantly more or less. Still others answer that no amount is too much to leave their children.

Might you feel better and your kids be just as happy if you leave them a bit less and give some portion to one or more worthwhile charitable organizations? Incidentally, there are a number of compelling types of irrevocable charitable trusts that have tax and non-tax advantages, known as “split interest” trusts. In such trusts, the interest (i.e. assets) being gifted is split between charitable and non-charitable beneficiaries (e.g. the children), with each receiving a portion at different times.

A crucial related question is “When is the right time for your children to receive their inheritance outright, with no strings attached?” For clients who have minor or young adult children, I often include a living trust provision that: a) if a child has not reached a certain age when his or her parent (or last parent) dies, the trustee is to dole out trust funds for the child’s needs (e.g. “health, education, maintenance and support”); and b) principal distributions beyond those needs are withheld until the child reaches a particular age, or a percentage at each of several ages. A parent’s decision about the right distribution age(s) may be based on any number of factors, such as when the child will likely handle a substantial distribution responsibly.

Some people choose instead to create a lifetime trust for each child, in which varying standards of distribution may be established, without any mandated age for outright distribution. Besides potentially serving as a “happiness” tool for the children, this option can create helpful creditor protection. This protection can include shielding assets for any married child (or child who later marries) who might otherwise commingle the inheritance with his/her spouse and then later get divorced.

In any event, once a child develops a solid work ethic and starts to experience successes based on the fruits of his or her own labor, the receipt of an inheritance is less likely to create problems. But choosing the right distribution age(s) in your living trust is often difficult and is a moving target. Your children change as do your assets, and perhaps also your objectives. So, it’s important to have your estate plan reviewed regularly by an experienced estate planning attorney. This helps ensure that your trust distribution provisions (among other trust provisions and other estate planning documents) comport with your wishes and the law, as each evolve. It also just might help your loved ones avoid the inheritance “Powerball trap”.

This article is intended to provide information of a general nature, and should not be relied upon as legal, tax, financial and/or business advice. Readers should obtain and rely upon specific advice only from their own qualified professional advisors. This communication is not intended or written to be used, for the purpose of: i) avoiding penalties under the Internal Revenue Code; or ii) promoting, marketing, or recommending to another party any matters addressed herein.

Mr. Silverman is an attorney with R. Silverman Law Group, 1855 Olympic Blvd., Suite 125, Walnut Creek, CA 94596; (925) 705-4474; rsilverman@rsilvermanlaw.com.

ESTATE & TRUST ADMINISTRATION: Need to find an experienced estate & trust administrator in Walnut Creek CA? Contact Robert Silverman at 925-705-4474 for legal advice on a Revocable Living Trust, “Summary” Estate Administration, Trust/Estate Beneficiary Representation and Will & Trust Disputes.

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