There isn’t a universally “best” age to receive an inheritance, as the optimal age can depend on numerous factors, such as the maturity and financial literacy of the inheritor, the amount of money in question, and the specific needs and circumstances of the individual or family.
Emotional and Financial Maturity
First consider emotional and financial maturity. An inheritance can be a significant windfall for a young person, and without the necessary maturity and financial literacy, it can quickly lead to poor financial decision-making and even financial ruin. A significant inheritance demands a high level of maturity for responsible management. Some people in their early twenties might lack the experience or financial know-how to handle large sums, while others might excel.
An Inheritance for Educational Needs
Next, evaluate educational needs. If you intend your child to inherit money to cover educational expenses, you should release the funds when the child begins higher education.
Understand Tax Implications
In New Jersey, you might expose all or a portion of your estate to the Compromise Tax (which is related to the Inheritance Tax) on amounts passing to a child in trust. This tax will depend on numerous factors including the age of the beneficiary, the amount placed in trust, the relationship of the remainder beneficiaries, etc.
Staging the Inheritance
Some estate plans release parts of an inheritance at different ages, like giving one-third at age 25, another third at age 30, and the final third at age 35 or 40. This method lets the inheritor mature in their financial management skills over time. The drawback is that it’s impossible to predict whether a lump sum distribution will be beneficial or detrimental at any particular age. Adding flexibility to allow an executor or trustee to delay a staged inheritance is an important consideration.
Also, if you delay the inheritance until an older age, you safeguard the assets from potential impulsive decisions or peer influence.
Consider a plan that releases all or a portion of an inheritance based on life milestones such as college graduation, first home purchase, marriage, or starting a business.
Guard against potential creditors. If the inheritor works in a lawsuit-prone profession or faces personal financial troubles, use trusts or other estate tools to shield the inheritance from creditors.
Provide guidance and mentorship. Offer financial education or mentorship to prepare your children to manage an inheritance effectively. Maybe introduce your children to your accountant and business partners. Try to create a pathway where your children’s financial acumen grows along with the size of their inheritance.
Other Considerations When Planning an Inheritance
What is the Nature of the Property being Inherited?
Another consideration when determining the best age for property inheritance is the nature of the inheritance itself. For example, if the inheritance is a family business or real estate that requires ongoing management and oversight, it may be necessary to wait until the beneficiary is old enough to handle these responsibilities. Alternatively, if the inheritance is a simple cash sum, it may be appropriate to transfer it at a younger age, once the beneficiary has demonstrated financial responsibility.
How Large (or Small) is the Inheritance?
The size of the inheritance is another important factor to consider when deciding on the best age for property inheritance. A larger inheritance may require a greater degree of financial literacy and responsibility than a smaller one, and it may be appropriate to wait until the intended beneficiary is older and more financially savvy before transferring such a large sum. On the other hand, a smaller inheritance may be more easily managed by a younger beneficiary and may be transferred at a younger age.
What should the Inheritance be used for?
In addition to these considerations, it is also important to take into account the intended use of the inheritance. If the inheritance is intended to be used for education, for example, it may be appropriate to transfer the inheritance at a younger age so that the beneficiary can take advantage of educational opportunities. Conversely, if the inheritance is intended to be used for retirement, it may be more appropriate to wait until the beneficiary is older and closer to retirement age before transferring the inheritance.
What is Your Relationship to the Beneficiary?
The relationship between the beneficiary and the person making the bequest is another important factor to consider when deciding on the best age for property inheritance. In some cases, a close relationship may provide the necessary support and guidance for a younger beneficiary to manage a large inheritance. In other cases, it may be necessary to wait until the beneficiary is older and has established a more independent relationship before transferring the inheritance.
What are the Tax Implications of Transferring Property at Different Ages?
Finally, it is important to consider the potential tax implications of transferring property at different ages. Inheritance taxes and estate taxes can have a significant impact on the value of an inheritance, and it may be more advantageous to transfer property at a younger age when the tax burden is lower. Conversely, waiting until the beneficiary is older may provide a greater opportunity to take advantage of tax planning strategies that can minimize the tax burden.
Determining the best age for a child to inherit money or property is a complex and highly personal decision that depends on a variety of factors. The maturity and financial responsibility of the intended beneficiary, the nature of the inheritance itself, the size of the inheritance, the intended use of the inheritance, the relationship between the beneficiary and the person making the bequest, and the potential tax implications of transferring property at different ages are all important considerations that should be taken into account. Ultimately, the decision should be made in consultation with a qualified financial advisor or estate planning attorney who can provide personalized guidance based on the individual circumstances of the beneficiary and the nature of the inheritance.