You have worked hard over your lifetime raising your children and providing financial security for yourself and, if you are married, for your spouse. You may be thinking that you would like to be able to provide one final gift to your children by leaving them an inheritance. How nice would that be to allow your children to have peace of mind in their remaining years because you were able to leave them an inheritance?
Or maybe you ride around in your car with one of those bumper stickers that reads, “I’m spending my children’s inheritance.” While that may be true, I will bet that you would rather have your children (or some other loved ones) inherit from you as opposed to your assets going to the government, the lawyers, or the courts.
Leaving assets to your children can be complex. Whether your children are young or old, rich or poor, married or single, you need to be aware of some important legal concepts that could jeopardize your children’s inheritance.
If You Have Young Children
If your children are young, you better have an estate plan. If you die before your children reach the age of majority and you have not properly designated legal guardians for your minor children, a judge will determine who will raise your children until they reach the age of majority. In addition, a judge will determine who will control any financial assets that your children inherit, and if any of those assets need to be spent on your children before they reach the age of majority (for school expenses, living expenses, etc.), a judge will have to approve each expenditure. This procedure is complicated and expensive.
Your Children are Grown
If your children are married, have been married, or even if they might get married in the future, you need to take action to protect their inheritance from their past or future divorces. You already know that many marriages these days end in divorce. What you may not know, however, is that if your children inherit from you and then get divorced, your child may have to share that inheritance with their ex-spouse.
You can also protect your children by arranging to minimize the tax they pay at your death. A federal estate tax exists that could require your children to pay up to half of their inheritance to the IRS. Capital gains tax and income tax can also be minimized or avoided through proper estate planning.
If you have children from a prior marriage, estate planning is a must. It is common for children to get nothing because their step-parent receives all the assets.
Example. James had three children from his first marriage to First Wife. James and First Wife divorced. James later married Second Wife. When James died, all of his assets went to Second Wife. James’ three children from his marriage to First Wife received nothing. When Second Wife later died, Second Wife left all of her assets (including the assets she received from James) to Second Wife’s children.
Proper estate planning can avoid these problems. James could have arranged his estate plan to provide for Second Wife but also provided that at Second Wife’s subsequent death, assets would revert back to James’ children.