3 Drawbacks of Leaving Children an Inheritance

by Tim on May 11, 2011

You’ve worked hard for your money and want the best for your children, right? If your savings has grown to be a significant amount, you’ll probably have a good chance of leaving it to your family, which, although it can seem like a blessing, could cause more harm than good. While most people won’t be on the receiving end of a large inheritance (less than 8 percent received any inheritance according to a CNN study conducted in 2000), it’s good to think about the ramifications of leaving your assets to children.

The Drawbacks of an Inheritance

1. It may foster a sense of entitlement

Your goal may be to bless your children by giving them a gift of $13,000 each year while you’re alive and set them up to receive your estate when you pass. While this is a very kind thing to do, it’s just as important to be cautious of how your gift is perceived. Although your children may have picked up solid financial habits from you, not all children who receive an inheritance will be as frugal as their parents were. I would even venture to say that most aren’t anywhere close to managing money like their parents. What might start as a helpful gift, could quickly be turned into an expectation by your child and foster a sense of entitlement each year as they expect another chunk of change to flow their way.

2. It may nudge them to splurge

When you combine an expectation of a gift or inheritance with the desire to ‘live better,’ the result can be a child who is living beyond their means. Instead of saving the money for their future, the recipient might use the extra funds to support a lifestyle they can’t really afford. They end up depending on the extra money to pay the bills and may not have enough to even support their own retirement.

3. Unexpected tax consequences if done incorrectly

I would recommend hiring a good estate planning attorney and CPA to help you create streams of income for areas you want to support. If you want to use your funds to bless ministries or create scholarship endowments, a charitable trust might be a great tool to ask your estate planning attorney about. In fact, you can actually receive a tax benefit now for assets you mark as a gift upon your passing. If you fail to plan, a bigger chunk of your assets will be sent to Uncle Sam, and not your children or favorite ministries.

Sitting down with your adult children to discuss your financial plans is a good way to set expectations and explain how you’d like the money to be used. Even if you’re not concerned with how they use the money, it’s important to understand how your gifts might impact their financial future – for good or for bad.

Have you ever been on the giving or receiving end of an inheritance? How did it impact your family? Have you ever seen someone negatively affected by a gift or inheritance?

Tim is a personal finance writer at Faith and Finance a Christian financial help blog that provides financial insights for individuals, businesses, and churches. Outside of finance, Tim enjoys spending time with his wife, playing the saxophone, reading economics books, and a good game of RISK or Catan. Find him on Twitter and Facebook and subscribe to the Faith and Finance RSS feed.

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