Graduated Inheritance Strategies

Many of today’s retirees have built up significant wealth over their lifetimes and will not spend it all before they pass on. The bulk of this money will be passed down to their children. But are their kids ready and responsible enough to put these gifts to good use?

I’ve heard from many retirees who want to pass their money on to their children but fear that they don’t have the restraint to use it wisely. These parents have worked hard for their whole lives to build up their assets and they hate the idea of passing it on only to be “burnt through” in a couple of years on new cars and vacations.

But what is the alternative? You could set up a costly family trust but a good chunk of your estate will be eroded by legal and accounting fees. Recently, a much simpler solution has emerged.

Many investment accounts that are held in “segregated funds” have the ability to create a graduated inheritance program. Instead of simply naming your children as the beneficiaries, you can elect to spell out your future wishes in detail and have the payouts administered at no cost to you or your heirs. So how does this work? Here are a few examples:

1. You have two adult children, one of which is very responsible with their money and the other is not. You could elect to give the responsible child their 50% of your portfolio right away while the other child receives their portion annually (with interest) over a 10 or 20 year period.

2. Your adult child requires a lifetime of financial support but is not capable of handling money on their own. You elect to have the value of your funds purchase a life annuity for your child that will provide a fixed or indexed monthly payment amount for as long as they live.

3. If you have a 10 year old child and your will states that they would live with your sibling if you pass, you could elect to leave 1/3 of your portfolio to them upon your death (held in trust and accessible as needed to help raise them). The remaining 2/3 could be passed on to them over a 10 year period starting at age 20 – so if there’s $500K left, they would receive $50k per year (or $4,167 per month) plus interest.

4. You have a 40 year old son who earns a decent income but spends everything they make and is saving nothing for retirement. Your investments could be passed on in a way that they don’t get access to any of the money right away but a life annuity starts paying them a fixed retirement income stream at age 60 or 65. If they aren’t responsible enough to prepare for their retirement, you can fill that gap.

The above are only a few examples and there are many other options to consider. A graduated inheritance strategy can be setup on your investment accounts or your life insurance policy. Equally important, the strategy you design is not “locked in” once you commit to it and can instead be adjusted or changed at any time. All of these options are done with no additional costs or fees; you simply fill out an addendum for your policy or account beneficiary designations.

For those of you with insurance or investment assets to pass on down the road, consider a graduated inheritance strategy to help ensure that your money provides the maximum impact for your loved ones.