$5.25 million: that’s the amount that parents are now allowed to leave to their children, family, favorite charities, and others without being hit with the federal estate tax, thanks to the fiscal cliff deal. That’s good news for particularly wealthy families, who would have otherwise been hit with an increased tax and a smaller exemption.
So now that wealthy parents can leave their kids with up to $5.25 million, the question becomes…should they?
Many parents with wealth are wondering if their children can handle a large inheritance without losing the motivation to work hard. In a survey by Bank of America’s U.S. Trust, many Americans said, “My children are not ready yet to inherit the wealth they will receive.”
Faced with doubts surrounding their children’s ability, many parents are choosing to create what are known as “quiet” or “silent” trusts, in which the kids aren’t informed of the large windfall until later—often as late as their 30s, 40s, and even their 50s. (Not all states allow these types of trusts, however.) These trusts may be a favorable option for some parents that want their kids to learn to lead productive lives, instead of relying on their inheritance.
However, quiet trusts also have their downside. These trusts make it impossible for trustees to get the heirs’ feedback about their inheritance’s investment and management. To make a quiet trust work, the trustee should report to a family member or extremely close family friend who knows the heir’s financial situation and will make sure that their inheritance is protected. In addition, when kids receive the inheritance later in life, they may not be delighted: they may be bewildered, hurt, and angry that their parents didn’t trust them to be responsible with the money.
The better alternative to quiet trusts is training your kids to be responsible with money from a young age. (After all, just because they get older doesn’t necessarily mean they will become significantly more financially responsible.) Invest in financial coaching for them, mentor them, educated them about money, and teach them the value of hard work. When these skills are instilled, it will be less likely that you or your kids will experience wealth regrets.