Assessing Financial Literacy

You’ve created your estate plan’s mission statement, and had a discussion with your heirs, but how do you assess the financial literacy of your heirs? And once assessed, how do you address any gaps in their knowledge? 

Without the necessary financial knowledge, heirs may struggle to manage their inheritance responsibly, potentially leading to financial mismanagement or lost wealth. Here’s how one can evaluate financial literacy and ensure their heirs are well-prepared.

Start with Open Conversations

Discuss financial topics during family meetings or one-on-one conversations.

Ask questions to gage their understanding of basic financial concepts, such as:

• Do they have a budget and savings plan?
• Do they understand the principles of debt management?
• Are they familiar with investing and risk diversification?
• Do they know (generally) how taxes and estate planning work?
• Heirs will likely have varying levels of these concepts – these questions are simply meant to get a baseline on your heirs understanding of fundamental financial concepts. 
  
  

Observe & Assess Financial Behaviors

Pay attention to how heirs currently handle money. Signs of financial literacy include living within their means and avoiding unnecessary debt, saving for future goals (such as retirement or emergencies) and investing responsibly and diversifying their portfolios.

Use of Financial Literacy Assessments

It may seem a bit too clinical or patronizing for some, but providing heirs with an actual financial literacy quiz to evaluate their knowledge is perhaps one of the most accurate ways to evaluate their level of understanding. 

Many online tools and resources are available to assess areas such as budgeting, investing, and retirement planning. A brief 10-question assessment can be found on the Council for Economic Education’s website. (Note: the average score for this assessment is 65%).

Reviewing Past Experiences

Consider how heirs have managed past financial opportunities, such as handling small gifts, managing educational funds or student loans. Starting and running a business or managing significant expenses.

Consult Professionals

Engage your Wealth Planning team to have candid discussions with heirs on your behalf. It’s often helpful to have a neutral perspective to identify gaps in knowledge or readiness.

Addressing Gaps in Financial Literacy

Other than sending your heirs to financial literacy classes or trying to find the latest book in hopes it’ll provide them with enough knowledge to manage the inherited assets, there are a few more practical options:

Provide Incremental Wealth Exposure

• • • Gradually introduce heirs to wealth management responsibilities by:

    • Allocating small sums of money for them to manage or invest.

    • Allowing them to oversee a portion of a family foundation or trust.

    • Encouraging participation in family financial decisions, such as investment strategies or charitable giving.

Encourage (or Force) Responsibility Through Trusts

When thinking about how you’ll pass on wealth, there are several options that will benefit your heir, but not give them access to 100% of the funds all at once. This distributes wealth in a controlled manner, helping heirs learn to manage money incrementally:

• • • Use of a Neutral Third Party: Nominate a third party to act as trustee of a Trust intended for your heir(s). This allows the third party trusty to make distribution decisions based on needs and financial maturity of the beneficiary.

• • • Spendthrift Provisions: A common addition to Trust documents, distributions can be set for any age or accomplishment of an event and help “gate” the amounts a beneficiary receives. This is commonly referred to as a "spendthrift provision" and can be written into any trust 

Example of an Age-based Spendthrift Provision: John and Jane want to leave their children (ages 21 and 18) all of their assets upon their deaths. However, they do not want to give their children access to 100% of the assets all at once and would prefer to stagger the ages at which their two children receive the assets.

Their estate plan could include language such as:“The beneficiary shall receive 25% of the assets at age 25, 33% of the remaining assets at age 30, 50% of the remaining assets at age 35 and finally 100% of the remaining assets at age 40.”

In this example, if the beneficiary were inheriting $100,000 (and excluding the effect of returns or inflation), the spendthrift language above would have the effect of giving the beneficiary $25,000 every 4 years from age 25 to 40: 

25% of $100,000 = $25,000 at age 25

33% of $75,000 = $25,000 at age 30

50% of $50,000 = $25,000 at age 35

100% of remainder ($25,000) = $25,000 at age 40

Building Financial Confidence

Create Opportunities for Dialogue

Hold regular family meetings to discuss the family’s financial situation, including investment strategies, charitable goals, and estate plans.

Allow heirs to ask questions and share their perspectives. Just as your intentions for the amount you leave behind may change, so could the perspective of your heirs. 

Normalize Seeking Professional Help

Teach heirs the importance of working with financial advisors, accountants, and legal professionals to make informed decisions. Emphasize that seeking help is a sign of financial maturity, not weakness.

Model Financial Responsibility

Demonstrate sound financial habits and involve heirs in your decision-making processes where appropriate. Share lessons learned from your own financial successes and challenges.

By assessing financial literacy and addressing gaps through education, controlled exposure, and professional guidance, parents can empower their heirs to manage their inheritance wisely. This preparation not only safeguards family wealth but also promotes long-term financial success and stewardship across generations.