Prince William, the elder son of Great Britain’s Prince Charles and the late Diana, Princess of Wales, recently got a very nice present for his 30th birthday: an inheritance worth more than $15 million. Under the terms of Diana’s will, each son (William and younger brother Harry), when he turns 30, gets half of the trust fund she left them. Harry will have to wait a few more years to claim his share.
It’s not surprising that Diana, though only 36 at her death, had done extensive estate planning and had obviously given some thought to how old her children should be when they inherited her fortune. But even though those of us who aren’t fabulously wealthy should consider the options when drawing up an estate plan that includes our children.
If you don’t set up some kind of mechanism for doling out money to your children, then they’ll get everything, no strings attached, when they reach legal adulthood at age 18. That’s not what most parents want.
If your children might inherit a sizeable amount of money, you’ll probably want to set up a trust for them, so that an adult you choose will be in charge of the money for as long as you wish. You can create this kind of trust in your will. (For more on your legal options, including different kinds of trusts, see "Leaving an Inheritance for Children.”
One popular way to structure inheritance is to direct the trustee (the person you choose to be in charge of trust money) to give the money in three chunks: one when the kid graduates from college (or turns 22), one a few years later, and the last at about age 30. Until all the money is distributed, the trustee has authority to use it for the purposes you set out in the trust document: for example, education and healthcare.
The most important factor is probably how much money your kids might inherit. If the funds will all be gone by the time your child finishes college, you probably don’t need to worry about a long-term plan. But here are some other things to take into consideration.
Your child’s maturity. This is the other key factor. Some kids can handle suddenly being given a large amount of money at a young age—but many can’t. You may want to come up with different solutions for different children. A lot of people who inherit money in their late teens later regret how they used it. Foolish spending isn’t the only danger; kids who don’t know anything about investing can see money slip away if they don’t have guidance. And becoming accustomed to receiving checks—without working for them—can make it harder to learn how to budget and save.
Life choices after high school. Do you expect your child to go straight to college? If so, you might make money for education available at age 18, either through a trust or outright. If you think your child will start working right out of high school, he or she might be able to use some money to start a business or family, or to buy a house. If you have a child who plans to join the military, you might want to hold the money back for a while, for the trustee to invest.
Extra-long-term plans. When should the strings be cut? Some parents, worried about their children’s judgment, set up management schemes that keep the kids from controlling their money until they’re middle-aged (or even older) themselves. The impulse is understandable if you’re looking at your teenager, who blows every dime on cool tennis shoes or gadgets. But try to resist it. After all, teens do grow up and mature. Keeping control over money, from beyond the grave, until your child is 40 will breed resentment—not the legacy you want to leave. And paying a trustee to manage money for many years can be expensive. At some point, you have to let go.