Teach Your Children: They Will Inherit Your Assets, Not Your Wisdom
By: By Carol Schleif | 2,793 Reads
"Death and taxes." Given that estate planning combines two of the most dreaded eventualities, is it any wonder that most folks have a difficult time warming to the topic?
A monetary legacy can provide an incomparable "leg up" and open a world of opportunity to the next generation--if that generation is adequately prepared. Inelegant handling of the training stage can, however, create generations of enmity, or breed unmotivated offspring with an entitlement attitude. Missteps are easy to make, since the issues are complex and multi-faceted. Here are a few key areas parents should consider as they grapple with intergenerational transfer issues:
Unveil your own financial management beliefs, the sooner the better. In the frenzied intersection of building and maintaining businesses and raising families, it can be overwhelming to take time to discuss "money" with your heirs. Perhaps your own financial affairs are not in as precise an order as you wish, assembled bit by bit as the years passed. But it does not take a four-hour discussion of the family balance sheet for you to open the dialogue. Start small, for example, by teaching key values such as "Spend less than you earn," and the importance of giving back to the community. Explain how you pay yourself first by funding your retirement account first. Explain how to use automatic payments to fund charitable donations. In today's electronic world, our children (especially if they are no longer at home) may not know that we are regularly divvying the resources in this way.
Delay talking about your financial balances. While it is best to start demonstrating your money philosophy early, most advisors agree that you should be very careful how soon you reveal "real dollars." Children understand very early where they are in the social strata relative to their peers. To the extent that privilege discourages children from finding their own purpose and reason for being, it can be an overwhelming burden and a disservice that lasts a lifetime.
According to many advisors, any significant amounts gifted to a child before age 25 can seriously impede that child's personal search for a meaningful livelihood. Some advisors recommend waiting until children are in their 40s or 50s before giving them direct access to significant unearned wealth. Part of the answer lies in what children are taught while they are growing up about the role that money plays in their lives. Children must learn the responsibilities attendant to affluence, not just be left to revel in the privileges.
Encourage your children to find their own passion and purpose. In her book Children of Paradise, Lee Hausner repeatedly stresses the importance of giving children the ability to develop wide-ranging competencies. For children growing up in affluent households, this can be especially difficult. As Hausner puts it, "Many wealthy parents lead lives that place them in strong supervisorial roles... Eliminating, or significantly diminishing, this 'take charge' orientation when parenting is not easy. But parents who assume the responsibility for making all the important decisions without input from their children are actively encouraging dependency rather than helping them develop competency."
The tough love school of intergenerational wealth transfer.Parents need to be aware of the emotional messages sent by funding their children. If a parent steps in with financial aid every time the child's credit card is overextended, for example, the messages the child receives are that "Struggle is bad," or "You are not responsible enough to get yourself out of jams." Come to a child's aid too often, and an entitlement mentality may become firmly established. Not all parental expenditures are bad, however. Paying for post-secondary education, for example, is a legitimate way to help children prepare for independent and productive careers of their own. It is best not to help your children out here or there just because you "can," because you think you "should," or because there is some tax advantage. Your children can inherit your assets, but not your wisdom. Personal wisdom is attained by personally overcoming obstacles and struggling to reach goals.
What does "fair" look like? Some givers are intent that equal dollar amounts flow to each child and the nuclear family of each child. Indeed, many professionals argue that this approach ensures future family harmony. Some grandparents, however, want each child to be treated equally and each grandchild to be treated equally--which means that the family of a child with a larger brood receives more of their parents' wealth than the family of a sibling with fewer or no children. Either approach is valid, and how well either works depends on the family's unique dynamics. The more that parents communicate to the children and grandchildren about what their perspective is and why, the fewer intra-family resentments there will be.
Though the issues surrounding wealth transfer planning are emotionally charged, they are not insurmountable obstacles. With thought and careful planning, affluent parents have an incredible opportunity to pass a lasting legacy--both financial and emotional--to the generations in their wake.
Carol M. Schleif, CFA, is regional chief investment officer at Abbot Downing, a Wells Fargo business that provides products and services through Wells Fargo Bank, N.A. and its affiliates and subsidiaries. She welcomes questions and comments at email@example.com.
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