Let's blame it on parental DNA. Somewhere deep in the marrow of our bones, many of us with children believe it is an act of love, generosity--or pursuit of forgiveness--to leave our children an inheritance. Sometimes we even convince ourselves that the more money we leave, the greater our act of love! However, is it possible the assumption that our kids will benefit from our parting gift is inherently flawed? Could it be that leaving money to our children after we die is a zero-sum game? Said another way, is it possible that for everything we give our children, we take something else away?
How would you react if I told you that your three children would never speak to each other again because you left them the family seaside cottage for shared enjoyment? Or, that some of your children felt slighted, and others guilty, because your bequests were unequal? Even worse, what if the child you designated as your executer engaged in self-serving behavior and was sued by his siblings for violating his fiduciary duty?
Impossible, right? Wrong. In fact, these kinds of outcomes are quite common. Money moves, and unfortunately, it can all too easily draw out the worst in the best of people.
Even if your children make it through the dividing of your estate unscathed, there is still room for error. Studies indicate that many beneficiaries quickly dispense with their inheritance. An Ohio State University study found that one third of people who received an inheritance had negative savings within two years of the event and that the vast majority of recipients “blew through it” quickly.
Most first-generation wealth creators worked hard, made mistakes, picked themselves up and persevered. They learned the hard way, and in doing so, became self-disciplined, resourceful and resilient. The second generation is not always as fortunate. Without diligent communication and teaching in their upbringing, the presence of parental wealth can lead children to become reliant on it.
Given the magnitude of what’s at stake, how do we minimize the liability an inheritance can pose on our children? How should we think about what we leave our kids? Let’s start by shifting the lens through which we view the challenge. Instead of focusing on the givers of wealth, lets channel our energy toward the receivers.
Introduce the concept of fiscal responsibility as soon as possible with a spend-save-share piggy bank. This system helps young kids figure out what to do with their money, and teaches them that we're all required to make choices with our money and the three broad choices are:
- Spend. Buy things we need and want now.
- Save. Set aside money to buy things in the future.
- Share. Donate money to help people, animals and the environment.
For older kids, budget an allowance to cover their expenses. Figure the monthly average spent on a teen's car insurance, cell phone, etc., and then give them an allowance to pay those bills. The tough part is letting the phone get shut off or taking back the car if the bills are not paid. Teaching that behavior and consequence are inexorably linked is a priceless lesson.
Sometimes, what children don’t know can hurt them. Imagine a young person with no preparation who suddenly comes into a trust fund because they've turned 21 – or worse – because their parents died in an auto accident. How would the trajectory of this young person’s life be irrevocably altered? And what might we have done differently to prevent some of the pain?
By the time your children have reached their early twenties, they usually are mature enough to begin learning about their family’s estate and the general plan for its disposition. Hiding the facts can be self-defeating. If the lines of communication are established early, the next generation can have the time to learn and reflect as they mature.
Make your legacy about more than money. Involving the whole family in determining common objectives and deciding how they'll be accomplished avoids the trap of mom and dad dictating the future to their children. It can also smooth tensions between family factions -- between those running the family business, for example, and those not involved.
Consider providing each child with a set amount of money and leave the rest to charity. If this is the case, adult children should be informed of the parents’ choice and the reason for the decision. Done this way, charitable giving can be a wonderfully unifying force where children feel a sense of ownership in the process and decision-making of giving. A family foundation or donor-advised fund are great tools for this kind of collective effort.
Establishing a trust can be a convenient tool to conserve an estate, reduce taxes, and provide for charitable giving. But more than convenience, a trust is critical for children under 21 and highly appropriate for young adults in their 20’s and 30’s. Because assets are held in the trust and distributed according to the pre-defined wishes of the trust’s creator (grantor), parents who create trusts find comfort in knowing that their children and grandchildren will benefit from a properly managed inheritance.
Trustees can play an important role as well. As the individual responsible to implement the mandate of the trust document, a well-chosen trustee could serve as a mentor for the next generation -- especially for teens and young adults, who might not always see their parents as the font of all wisdom.
Money is like a narcotic; a little bit more is always nice and the last amount never quite enough. Could it be that the best “inheritance” of all doesn’t involve lawyers, financial advisors, or even money? Might it be that the best legacy we can leave is to pay attention to our kids, spend time with our kids, and just love our kids?
If true, then our legacy, and perhaps that of our children, is in our hands.
Kevin McVeigh, CFA is a Managing Director and Partner at Exchange Capital Management, a fee-only, fiduciary financial planning firm. The opinions expressed in this article are his own.