Oct 20, 2009

Bergdorfs or the Bank?

A friend used to joke that if he died, his teenage son would promptly convert his inheritance into quarters. He'd lug the loot down to the video arcade, where he'd burn through his dad's life savings in a haze of nonstop video gaming. Poof, it would be out the window in short order.

Fifteen years on, I'm happy to say that my friend is alive and well. As for his son, he has matured into a hardworking, fiscally responsible adult -- although not above spending the occasional weekend perfecting his Guitar Hero skills.

Not every parent is as lucky as my friend. We all know people whose adult children never developed a clue about managing money. If an inheritance fell into their hands, they'd blow it at Bergdorf's, not bring it to the bank. Folks like this prefer a Hummer to Harvard. They consider a four-carat diamond more fun than a 401K.

Obviously an heir who doesn't understand the value of a dollar is not a good candidate to receive a large inheritance as an outright sum. If you have such an heir, you'll want to protect her from herself and prevent her from squandering the funds. Fortunately, there are methods to accomplish this. One popular approach is to create a trust that pegs your heir's inheritance to certain benchmarks. For example, you could dole out the inheritance in smaller portions, for example specifying that 25% of the inheritance goes to your grandson when he is 25, and an additional 25% when he is 35, 45 and 55. You could require your daughter to graduate college, or be working full-time for a minimum of five years, or attain the age of 35, to receive her inheritance. I even have one client who decided that the funds would be disbursed to his grandson based on his grandson's income: for every dollar earned, the trust would release a dollar. The point is to encourage your loved ones to become productive members of society, not provide a means for them to dodge responsibility. Recently I read about a novel approach to this issue, one that I would like to see used more widely. The Bank of Montreal, in response to requests from its high-wealth customers, is offering money management classes for people who have or will come into money, whether by marriage or through inheritance. What a great idea! Read more here.

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