Leaving an Inheritance to Your Kids: How Much Money Is Right?

By Aimee E. Calderon, CFP®

You may have many questions as you consider leaving an inheritance to your children. Wrapped up in the questions are a lot of emotional issues to navigate as well. Here are a few of the important questions you may be grappling with.

How Much Should I Leave?

You have many ways to approach the question of how much money to leave your heirs. For most middle-class families, the answer is simple: whatever is left over after you pass away. But, if you are someone with a high net worth, you may be concerned about spoiling a child if you leave them everything. Or, you may be concerned that they will not work hard if they are handed a large nest egg.

These are valid concerns and must be considered for each heir individually. It is important to have a grasp on your children’s personalities and let that help guide you as you make decisions.

Should I Put Restrictions on the Inheritance?

As financial planners in Orange County, California, we often see clients leaving inheritances to children. Sometimes, there are restrictions placed on inheritances (usually through a living trust) that affect a child’s ability to access the money. If a parent believes that their child will spend through an inheritance quickly, they may decide to leave the inheritance in trust with a provision allowing the child to receive income only off the investments.

Another common technique is to set up age restrictions where the child will receive only a portion of the assets as they turn certain ages. Or, maybe you don’t care what they do once you are gone.

The important objective is to identify your goals for the money and your child’s tendencies. Then you can consult professionals and find the right solution.

Should I Give the Money to Them Now or When I Pass Away?

Deciding when to give the money to your heirs is another important question to consider. You may decide that you’d like to give the money to your children while you are still alive so you can enjoy watching the benefits the money brings.

While it may be enjoyable to give money to your children while you are alive, it is important to make sure you keep enough to take care of yourself first. Using retirement projections, you can plan for the future and take into account potential changes in your needs.

One of those needs is health care. These costs could drastically increase during the later years of your life. Making allowances for increased expenses for health care or long-term care is important when considering whether to give away money during your lifetime.

Do I Need to Be Fair?

We often have clients ask us this question with respect to leaving money to their children. Of course, there is no hard-and-fast rule, but the question can be worrying for many. There are many reasons why you may not choose to leave an inheritance equally to your children. Relationships may be estranged, or maybe one of your children has been very financially successful.

Communication can be helpful in these situations. We had a client decide to give one of his three children less than the other two because of her financial success. He communicated this to her when making his estate plans, and she was very understanding, indicating that she planned to give the inheritance to charity.

We’ve also seen it suggested that parents write a letter for their children to receive after their passing that explains their decisions.

What Is the Most Effective Way to Leave My Money?

Tax laws are complicated and often change, but with careful planning, you can reduce the tax impact of your gifts and therefore increase the benefit of your children’s inheritance. Each individual’s situation is different, so consulting with a financial advisor and estate planning attorney can be beneficial when deciding how to leave your money.

If you have charitable intent, naming a charity as the beneficiary or partial beneficiary of an IRA account can be a good strategy. If you leave an IRA to a child, new tax laws state that they must withdraw the entire account within 10 years. This money is considered taxable income and will increase their tax liability. However, a 501(c)(3) charity is tax-exempt and can inherit the IRA without a tax liability. Leaving non-retirement assets to a child and tax-deferred accounts to a charity can increase the total effect of the inheritance.

All these questions are very personal and should be given a lot of thought and time when deciding. The questions above are just a brief overview of some possibilities. A trusted financial planner and estate planning attorney can help you navigate the decisions that need to be made.

Remember that a financial inheritance is only part of the story. The money will be spent, but your legacy will live on in your children and grandchildren. Your time shouldn’t just be spent on building an inheritance but should be spent on building a great legacy.

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