How to Prepare your Heirs to Receive, Preserve, and Grow Their Inheritance

Estate planning is a process, one with which you have likely been engaging for most of your adult life. Even without consulting an attorney, doing things like taking out a life insurance policy, naming a beneficiary on your retirement account, or making a carefully-labeled photo album for future generations to enjoy, are all parts of the estate planning process.

The more formalized steps -- meeting with an attorney, creating a trust, preparing a will, drafting durable power of attorney, and executing an advanced healthcare directive -- are about protecting and preserving your legacy so that it can be passed on to your heirs. There is a final step in this process that is often overlooked: preparing your heirs to receive, preserve, and grow the inheritance you leave behind. What were all those years of work and saving and estate planning for if, after your death, your loved ones immediately mismanage or exhaust their inheritance?

Avoiding Uncomfortable Conversations Can Do More Harm than Good

The most important way that you can prepare your heirs to receive an inheritance is to open communication about your estate plan. This can be an uncomfortable conversation, but it is absolutely essential to the preservation of your hard-earned wealth. If you never speak to your heirs about what they will inherit and how you expect your estate to be used, you run the risk of joining the statistic that shows the majority of people who receive a financial windfall lose it within one or two generations. This discussion is not limited to those who have amassed vast wealth. Even if your estate will be relatively small, it is important that it is transferred to your heirs in a way that can have a positive impact on their lives.

There are a few common reasons that parents do not talk to their children or other heirs about their estate plan. The most common one is a general discomfort in discussing mortality and finances with loved ones. By giving into this fear, parents are missing out on a valuable opportunity to be parents even later in life. Think about your estate as a way of leading by example. You have saved, worked hard, and invested wisely to be able to accumulate wealth that you can provide for yourself and pass on to future generations. When you die, your heirs will inherit not only wealth but also the responsibility to build upon your legacy for future generations.

Communication is Key

Along with any assets you may intend to pass on to your heirs, you also are passing on the lessons, experiences, and values that you have instilled in your children throughout their lives. When you approach your heirs to begin this conversation, remember that it is more about these values than about the details of the inheritance. The key message should be imparting the values of saving, sharing, growing, and preserving wealth. Details don’t need to include the exact amounts to be inherited but should include information like how assets will be distributed, to whom, in what proportions, and if there are any trusts that will manage distributions.

If you have been avoiding this conversation because of a difficult family situation or because you know the conversation will lead to conflict, that is all the more reason to start now! Conflict will be much worse and much more damaging long-term if it occurs after your death when you are not around to explain your decisions and mediate conflict. You need to share your decisions and, more importantly, the intent behind your decisions with your loved ones.

If you have one or more children who need to inherit funds differently than others (such as a Special Needs Trust for one child with a history of drug abuse), the conversation is still important, but you may choose to include an intermediary, such as your estate planning attorney.

Encourage your heirs to ask questions and include you in their plans for their inheritance. Many people who expect to inherit money in the future have thought about how they would use the funds, but they are afraid to speak about it for fear of sounding greedy or morbid. Share with your heirs that you are there for them if they want to discuss their options with you. This is another great way for you to impart your values and experiences before you pass.

Sometimes people decide they want to surprise their loved ones with something special after they pass. Their inheritance should not be this surprise. Instead, consider writing letters or making video or audio recordings that can be cherished for generations to come. The inheritance, on the other hand, should be discussed and fully explained ahead of time to avoid confusion, resentment, family conflict, and squandering of the assets.

Preparing for an Emotional and Financial Change

As you talk with your heirs about how they will utilize their inheritance, it may be a good idea to set a period of time during which no major financial decisions should be made. Remember that this financial windfall will occur simultaneously with an incredibly emotional and vulnerable moment - the loss of a loved one. Encourage your heirs to move slowly. They should allow the circumstances and the loss to settle in and then execute a strategy for the funds.

Providing for Long-Term Distribution

If you are concerned about one or more of your heirs squandering his or her inheritance, a trust might be a good option. For heirs with disabilities or other special needs, you may decide to set up a Special Needs Trust that is designed to release funds to provide for the long-term needs of a loved one. If an heir has large debts or other financial vulnerabilities, a trust is a particularly good idea. A trust can be designed to release funds to beneficiaries in smaller amounts each year and then in larger distributions at certain milestones, such as age 30, 40, etc. Trust distributions can also be tailored to support life events such as education, weddings, and purchasing a home.

Make Use of All Tools Available to You

Once you have broached the inheritance conversation with your loved ones in a comfortable, appropriate setting, you can formalize it by inviting your estate planning attorney into the discussion. This gives the attorney a chance to explain the probate process and any trusts to your heirs, as well as gives them a chance to ask questions about how things will work. It is a good idea for your heirs to begin building a relationship with your attorney and the firm you have chosen so that they will be comfortable when the time comes to put your estate plan into action.

In a meeting with your attorney, it is a useful practice for you to fully explain your preferences for how assets will be distributed and how they should be used. Your heirs can then express how they understand the process to work. Your attorney will be able to correct any misunderstandings or clarify expectations. This may also help you and your attorney identify places where your estate plan may need to be adjusted to match your anticipated results.

If you haven’t yet created an estate plan for your family, or if you are having difficulty raising the issue with your loved ones, reach out to Stewart & Gordon. We can help you communicate your wishes to your heirs and ensure that your estate plan creates the results you intend. To begin speaking with an attorney, give Stewart & Gordon a call at (303) 337-2400.