According to one recent study, around 25 percent of American parents are planning to spend all their money in retirement, and not leave their children an inheritance. Interestingly enough, not leaving an inheritance seems to be somewhat of a trend among the ultra-high net worth these days. Investing guru Warren Buffet, tech titan Bill Gates and singing superstar Sting have all said their kids would not receive an inheritance.
Less than 10 percent of American parents are saving as much money as they can to leave it to their children. That leaves the vast majority somewhere in between; around 66 percent plan to spend some money and save some for the kids.
Of course, all parents want the best for their children. Many parents are saving and investing for the future of their children with the intention of leaving a legacy. However, legacies are sustained when you can teach your kids how to create and build wealth from their own, individual efforts.
Maybe a good course of action is not to give your kids a handout, but a hand up. Perhaps along with leaving our kids an inheritance, we provide them love, guidance, support and the wisdom of valuable lessons about money. That way, we enable our kids to make financial choices without using their trust funds as a safety net.
Here are some strategies to help you along the path of giving your kids a hand up, not a handout:
Talk about money
Starting young and discussing foundational money concepts makes it easier when your kids get older, and the stakes are higher. Though many parents have been taught that money is a taboo topic, making it a part of everyday conversation helps kids develop a healthy relationship with money.
Teach as they grow
Though some parents start teaching about money as early as the toddler years, many begin giving an allowance around age 5 or 6. 2nd or 3rd grade is when most kids’ math skills get to the point where they start understanding money arithmetic, and you can start introducing more ideas. One popular concept many parents teach is the Save, Spend, Share model.
- 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.
When your children reach the teenage years, begin the discussion of things like the stock market, long-term savings, and budgets.
Create a trust
If you are a high net worth or ultra-high net worth individual and plan to leave any money to your children, a trust is critical for children under the age of 21 and highly appropriate for young adults in their 20s and 30s. Trusts are extremely helpful because, as a parent, you set the parameters around distribution of the assets, and can take comfort knowing your kids will benefit from a properly managed inheritance until they reach the age you are comfortable they can handle it themselves.
Create a personal foundation
Philanthropy is an integral part of the lives of many high net worth and ultra-high net worth families. If you are in that category, you might want to consider creating a personal foundation to teach and involve your kids in your family philanthropy efforts. For example, if you have a family of 5, you could create a personal foundation that is required to disburse 5% of the balance each year and give each family member the responsibility of researching a cause and donating 1%. You might be surprised at how excited your kids get about finding a cause that resonates with them! Many families find this yearly exercise is an excellent experience for the whole family.
Give directly, don’t give cash
The cost of mortgages and school loans has ballooned from what it was 30 or 40 years ago, which is why some parents want to reduce or eliminate those burdens for their children. If you find yourself in this group, I would recommend paying down the loans directly instead of putting that amount of cash in their hands. This gift can make a significant difference in your child’s future financial position but eliminate the temptation for your children to allocate the funds to other wants or desires. Of course, it’s a given you need to check and make sure there are no pre-payment penalties or other negative consequences.
As a parent, you are the one who knows what is best for your kids when it comes to an inheritance. With some planning, your money can be a tool that enriches their lives and lifts them up, rather than an anchor that drags them down. Consider the strategies discussed above and reach out to me here if you would like to discuss further.