How to plan an inheritance

When you think about providing an inheritance to your loved ones after your passing, you may have high hopes that the funds will improve their quality of life for many long years or even decades. However, cases of people obtaining a windfall of cash, such as through lottery winnings or an inheritance, have been well-documented. There are numerous instances where individuals have blown through millions of dollars in a very short period of time and who are left in dire straits for the remainder of their lives. There are a few steps you can take as you plan an inheritance that will prevent this from becoming an outcome for your loved ones.

Determine Your Intentions

As a first step in planning an inheritance, it is important to determine who the funds will go to and what goals you want to achieve by giving them the money. For example, you may have adult heirs who have proven their ability to manage their finances, and you may be comfortable giving them a lump sum of cash. Perhaps you have younger heirs who have been frivolous with their money. Consider taking your heirs to financial planning meetings so that they are aware of your intentions and can learn how to use the money once they receive it.

Set Up an Inheritance Structure in Line With Your Plans

With each heir, you may have a different financial plan. Some heirs may receive a lump sum of cash. Minor heirs may receive funds through a trust that is established under the supervision of a parent. Others may receive an inheritance through an annuity that doles out cash on a monthly or quarterly basis.

Create Financial Guidelines

There may be no requirement for your loved ones to follow your guidelines after they have access to the funds you provide to them. However, you can create guidelines with the best intentions, and some heirs will follow your instructions. For example, you can instruct a younger heir to invest at least a portion of the funds they receive each month from an annuity. Explain that the investment will provide additional wealth after the inheritance payments have ceased.

You may not be able to fully control how your loved ones spend their inheritance after your passing. However, you can create safeguards and controls through how the inheritance is provided to them. You can also educate them about finances in your living years and provide instructions for the funds after your passing. By taking these steps, you can create an effective inheritance plan.