How to Set Conditions on an Inheritance for Your Children

Warren Buffett once said the right amount to leave a child is enough that they feel they could do anything, but not so much that they feel they need to do nothing. Few families ever have to worry about the second half of that problem. But plenty of parents worry about the first: that a son, daughter, or grandchild might blow an inheritance on drugs, gambling, or a bad relationship, or simply make poor financial choices with money they didn't earn. Some parents respond by cutting a troubled child out of the will entirely, on the theory that a windfall would only make things worse.

There's a lot of middle ground, though, between handing over money with no conditions at all and leaving nothing. If you're worried that an inheritance to your adult child could disappear fast, consider these approaches.

This guide draws on estate planning research by Mary Randolph, J.D.

• Leaving a child out of your will
• Attaching conditions to the money
• Spreading payments out instead of a lump sum
• Building in incentives
• Locking the money up for the long haul

Leaving a child out of your will

You're allowed to leave an adult child nothing. Minor children are sometimes treated differently: a court might award them a share of the estate if it looks like the parent simply forgot to update a will after the child was born, though this depends heavily on state law and only applies in narrow circumstances. Outside of Louisiana, no adult child has an automatic right to inherit if a parent chose, on purpose, to leave them out.

If you plan to exclude a child, say so directly in the will. You don't owe anyone an explanation. Simply list each of your children by name and note that any child not receiving a share was left out deliberately, not by mistake.

Attaching conditions to the money

If you doubt your child will handle a windfall wisely, you can hand the decision-making to someone else instead. The usual tool is a trust: you name a trustee, someone responsible for managing the trust's assets and deciding how and when the money reaches your child.

Choosing that trustee isn't simple. They'll need to invest the trust's assets, keep records, and make ongoing calls about how the money should be used for your child's benefit. You can write guidance into the trust document, but ultimately the trustee has to approve or deny actual requests.

That's a heavy responsibility to hand a friend or family member, and it's especially awkward if you ask a sibling of the beneficiary to take it on. A professional trustee, such as a bank's trust department, is another option, but it comes with trade-offs: fees, a minimum trust size most institutions require, and the fact that you're putting deeply personal decisions in the hands of an institution rather than a person.

This arrangement can run for years, and you decide how long. You might set an age at which the trust ends and any remaining funds pass to your child outright. Or you can leave the timing to the trustee's judgment, allowing them to close the trust early if, say, your child has clearly moved past whatever issue prompted the arrangement, such as recovering from addiction.

Spreading payments out instead of a lump sum

A simpler way to control the pace of an inheritance is to set up a trust that pays out in stages rather than all at once, for example, one-third at age 25, one-third at age 30, and the remainder at age 35. Yearly installments work too. Either way, the trustee doesn't have to make judgment calls about spending; they just release the amounts the trust document specifies on schedule.

If you'd rather skip the legal costs of setting up a trust, an annuity is another route. An annuity is a contract with an insurance company that promises payments to a named beneficiary. People often use them for retirement income, but you can just as easily direct the payments to a child. You can choose fixed payments over a set period, or variable payments tied to how the underlying funds are invested.

Building in incentives

An incentive trust ties payments to behavior you want to encourage, or behavior you want to discourage. You might release funds when a child finishes college or holds a job. Or you might tie payments to something specific you're hoping to see change, such as completing a rehab program or staying substance-free.

These trusts ask more of the trustee than simply exercising good judgment under general guidelines. The trustee may need to look into what the beneficiary is actually doing and push back on claims that don't hold up, which is rarely a comfortable role.

Locking the money up for the long haul

Families with substantial wealth sometimes use what's called a dynasty trust. Despite the grand name, it's essentially a trust built to keep going indefinitely, or for as long as the assets last. Keeping money inside a trust like this can shield it from your descendants' creditors, divorces, and poor decisions, and it can reduce certain taxes as well.

These arrangements are legally complex. They need to be drafted by an attorney experienced in trusts, investment rules, and estate tax law, and the right structure will depend on your state's laws and your family's specific situation.