While schools today seem to be a bit better at teaching kids the basic financial skills that are important to navigating adult life (how to create and follow a budget, what in the world APR is, why you generally want to avoid payday loan places), there’s still a long way to go. And if you go back twenty years or more, even those kinds of things weren’t discussed. 

In other words, if you have adult children, they probably didn’t enter their adult lives with much of an understanding of personal finances or a deep sense of financial responsibility.

One of those things that no one talks about? How to manage an inheritance wisely. You can probably picture it: passing on your legacy to your adult children… only to have them squander it within a few years – or even less time. It’s enough to fill anyone with anxiety.

Thankfully, there are a number of estate planning tools you can utilize to protect your beneficiaries from themselves and encourage them to develop valuable financial management skills. Here are just a few:

Use Trusts Wisely

Trusts provide structure. These powerful tools can prevent reckless spending by young adults by structuring their access to their inheritance. Let’s consider an ordinary revocable living trust, the most common type of trust here in Texas:

Within the revocable living trust, you can place incentives to reward positive behaviors such as maintaining employment, pursuing further education, or achieving financial independence. You can appoint a trustee to manage the young adult’s finances, and give that manager specific instructions to help your children. By linking inheritance to responsible actions, you encourage your children to develop independence rather than relying solely on inherited wealth.

Provide Financial Education and Resources

Consider incorporating financial education into your estate plan. You can direct funds toward financial literacy courses, seminars, or consultations with financial advisors. Remember, the trustee you appoint will have instructions about how to best help your family!

Encouraging your adult children to work with a financial planner can help them develop strong money management skills that will help them make responsible decisions with the assets they inherit from you.

Transfer Wealth Gradually to Build Experience

Rather than leaving a large lump sum inheritance, consider a staggered distribution plan. Providing smaller, periodic distributions allows your children to gain experience managing money over time as they (and their funds) mature. 

This approach reduces the risk of mismanagement and helps them develop good financial habits.

Discuss Charitable Giving and Legacy Planning

Teaching financial responsibility also involves instilling values around giving back to the community and long-term financial stewardship. You might consider establishing a family foundation or donor-advised fund, allowing your children to participate in charitable giving decisions.

This practice helps them understand the impact of wealth on the local community and fosters a sense of responsibility.

Name the Right Trustee

A well-chosen trustee can serve as a mentor, guiding young adults in making sound financial decisions. If you do not believe that your children are financially responsible enough, appointing a professional trustee or a trusted family member with financial expertise can help safeguard assets and provide necessary oversight.

Another Important Teaching Tool? You!

Beyond the tools and methods that exist on paper, one of the most important things you can do to promote financial responsibility is to give your children the “why.”

By having an honest discussion of your financial values, goals, and plans with your adult children, you can set expectations and help them understand the importance of responsibility if you aren’t there to handle it for them. It also provides you with the opportunity to share insights into how you built and preserved your assets, and to emphasize the principles of budgeting, saving, and investing.

Remember, estate planning isn’t just about passing down assets – it’s about ensuring your legacy continues. We want your family’s situation to be stable, sustainable, and cooperative. If you’d like to learn more about how estate planning can help you teach financial responsibility to your kids, get in touch to schedule a free consultation.