November, 2007
Will Your Kid’s Inheritance Make Her or Him a Monster? It Needn’t If You Plan Well
The airwaves are full of cautionary tales of young people who received too much money too soon – wretched excess is in, and responsibility seems, well, pretty boring. And your last name doesn’t have to be “Hilton†for you to worry.
Most financial experts will tell you that the best scenarios involve early planning, solid parenting and complete family involvement from the start. Here are some suggestions on how to raise a responsible heir:
Get advice early: If you have created a successful business or amassed a fortune working for a fast-growing employer, it makes sense to sit down with tax, legal and financial advisors to talk not only about the “Number One” goal of protecting those assets, but also about passing them intelligently to the next generation. Because these conversations should go beyond sensible money and tax management to how these assets will affect your family’s entire life, one of the first questions you should ask is, “How do I train my kids to inherit this money?†Also, it’s critical that you include the unthinkable in your discussion – how your surviving spouse or designated guardians will continue this stewardship if you die. You need to make sure your plan is effective particularly if you’re not there to carry it out.
Start basic money training early: In most households, children start learning about money and what it does around age 4 or 5, even if it’s only centered on how to buy a treat. Obviously, your kid might have some idea already that parents have money, so you have to strike a balance between the reality of your fortunate situation and the responsibility training all children need, whatever their circumstances. Don’t lie about what you have, but when kids are this young, you’re not anywhere near discussing what they may inherit when they’re older. It’s not their money anyway. Instead, introduce your kids to chores and a modest allowance to cover essentials, treats and savings that you’ll agree upon. Then watch closely to see how your child is learning these skills. This is the bedrock of how they’ll be handling money the rest of their lives.
Lead by example: If a kid grows up in a house where parents spend indiscriminately and settle disputes with the kids with money and toys, chances are the child will repeat those patterns in later years. If a kid grows up in a house where parents set money priorities for themselves, participate in charity and community service and expect their children to do the same, that’s a powerful lifetime lesson about wise choices.
Prepare a family mission statement each year: This may get an eye roll from some family members. But a once-a-year meeting to discuss what’s important in family life is a great mechanism not only to find out how the entire family is doing with regard to personal values and goals, but a great way to work in a purposeful wealth message that expands over time. When children are young, they should be allowed a vote in how family money is spent for particular luxuries like vacations, and as they get older, parents can elect to expand their vote in other areas, such as general investment policies for the family holdings.
Involve the kids in investment and planning: If a child is inheriting wealth at a certain age, it’s entirely fair to bring him or her into the process of thinking about the care and feeding of that wealth at a significantly earlier age, possibly in the early teens. Before that, it might be fun for them to buy a particular stock or mutual fund that they can own jointly with you so they can see how investments perform. Eventually, you can migrate their attention to their potential inheritance, how that money is currently invested, and what efforts should be taken to protect its principal. Children need to understand that wealth needs to be tended to in order to grow – you might even consider bringing them to meetings with your money managers so they can learn about the process over time.
Raise the suggestion that wealth should stay invested: Wealthy relatives need to tread carefully here, because if a young person gets money, they’re going to want to have some fun with it. It’s important to teach the message that a significant part of the inheritance should stay responsibly invested so the child can address a personal goal (family philanthropy, advanced education, starting a business) or have wealth to pass on to their families. This is a good opportunity to consider the question, “what is our money best used for, and how can we be wise stewards of our wealth?â€
Get them some independent training: The wealth management industry is directing training resources toward younger clients who may come into considerable fortunes at a later date. It’s to their benefit – they want to keep that business. But if you are already working with investment experts whom you trust, why not ask them about the training you’d like your kids to receive after you’re not around? As adults, they are going to eventually handle decisions on their own – it might be wise for them to continue their learning in an adult environment where they can take the lead in a discussion.
November 2007 This column is produced by the Financial Planning Association, the membership organization for the financial planning community. It has been modified and is provided by Thomas A. Fisher, a local member of the FPA.
The material presented is believed to be from reliable sources and we make no representations as to its accuracy or completeness. All information and ideas should be discussed in detail with your own adviser prior to implementation in order to determine whether the strategies mentioned are appropriate for your specific situation.