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Consider These Strategies Before Leaving Your Kids An Inheritance

Consider These Strategies Before Leaving Your Kids An Inheritance

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Estate planning techniques like the incentive trust can nurture healthy ambition while also ensuring that an inheritance will not interfere with children going on to lead meaningful lives of their own. According to Forbes money can enable children to have a financial cushion that helps them lead better and more fulfilling lives. Money can also suck the ambition and initiative out of children who are not prepared for the sudden influx of wealth.

Is Inheriting Money Always a Bad Thing?

CNN News Host, Anderson Cooper, is the son of Gloria Vanderbilt, who was one of the heirs to the Vanderbilt shipping and railroad empire. He asserts that inheriting money is always bad for the inheritor. He says it’s an “initiative sucker.” Mr. Cooper’s position is well-founded with numerous examples of trust fund brats, heirs to fantastic fortunes who never do more than live lives of leisure, spending money without accomplishment. The drive to earn money and build a better life is the at the core of a capitalist democracy. Without that drive, people can become complacent, failing to achieve anything.

But there are ways provide the safety net that an inheritance provides while encouraging children to use the money wisely in their pursuits, rather than to waste it.

A Financial Test

The gift tax limit is $14,000. A married couple can gift $28,000 to as many people as they like, but never more than $28,000 to any single person without gift tax consequences. According to Forbes, a strategy that can be used by concerned parents is to provide smaller gifts of a few thousand dollars to see what their children do with the money. Does the child use it to pay down debt; invest; or blow it all on a binge weekend in Vegas?

The Incentive Trust

The incentive trust incorporates incentives into the terms of the trust that limit when and how the beneficiary can access the funds.

For example, the euphemistically titled “investment banker clause” distributes funds annually based on the income earned by the beneficiary. For instance, for a daughter who is working her way up the corporate chain and earns $75,000; the trust would distribute $75,000. Conversely, a son who earns only $20,000 would receive no more than $20,000 from the trust. Trust can also be structured to reward work at nonprofits like the Peace Corps or Teach America, or to provide monetary disbursements upon the attainment of degrees.

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