Two things are of critical importance when it comes to wealth: how to build it and how to keep it. If you have a family, then at some point, you may wonder how to talk to your kids about the family’s wealth and how it will affect them. If you are looking to make life easier for yourself, we are happy to help with the following list containing nine tips on how to prepare children for their inheritance.
Tip #1. Educate your children about finances from an early age.
It does not matter if you are one of the 8.5% of the richest world citizens who inherited all their wealth, one of the 25% who has combined inherited and self-made wealth, or if you one of the 75% whose wealth is completely self-made. What your children learn in school about finances (if anything) does little to nothing to help them cope with the sudden inheritance of money. All children need to know and understand the value of money, the value of philanthropy, and that money is just one implement in their survival toolbox that can help accomplish their goals.
Tip #2. Share information about the family’s current net worth and anticipated changes.
Only you know when your child is ready to talk about the family’s finances. General discussions about finances can start at an early age while discussions about the family’s net worth, the changes in family status, and strategies to maintain the family’s lifestyle are probably better left to the pre-teen years and later. Keep your mind open: your pre-teenagers may surprise you with their introspection and insights. Even the little ones can gain insight from discussions about types of savings and what it means to invest in something. Whenever you decide to talk to your kids about finances, remember to keep the discussions factual and inspirational, not stressful or overly emotional. Remember: it’s not a discussion about death. It’s a more general discussion about handling money.
Tip #3. Prepare your kids for a financial test.
No, this is not a written test. It’s a life test. The 2020 US tax laws permit a person to give up to $15,000 (30,000 for husband/wife) to each of your kids before the gift tax applies. Obviously, you don’t want to give $30,000 to a pre-teenager but your older children can benefit from this little experiment. You can see how they handle unexpected big money. You will learn whether they are disposed to:
- salt it away in a sound investment for future growth;
- pay off bills (credit cards, school loans, etc.);
- use it to buy a house; or
- go to the nearest casino.
You will want to observe whether they ask for advice on how to spend/invest the money. This experience gives good clues as to their readiness for an inheritance when you are no longer in the picture. And it happens when you can still make corrections to their behavior towards money.
Tip #4. Create motivating clauses in your children’s trust.
Many parents want their kids to set and attain goals for their financial independence. One way to encourage such behavior is to set “matching” motivational clauses in the distribution provisions of the children’s trust. If one of your kids’ performance in the world of work has been lackluster, try giving them an incentive to aim at higher-paying employment. An example of a motivational clause might distribute an amount from the trust that matches the annual income earned each year. So, the more you earn, the higher the amount of the child’s individual distribution each year.
Tip #5. Give the gift tax exclusion amount as something other than money.
The suggestion does not mean go out and buy expensive gifts; rather, it means you can help your children pay off school loans, or make an extra mortgage payment to pay down the balance quicker. You control how the gift is spent. Paying off credit cards is not appropriate; that’s like giving them money to spend wherever they want. The tip idea is that your gift helps build your child’s wealth by securing their family home faster (which means they still have to work to pay the rest of the mortgage) or by helping to get the family out of debt.
Tip #6. Create a private foundation with the money.
If your children still live with you, give some thought to creating a private foundation with the money you are planning to give to them. The tax laws permit a generous tax deduction and mandatory annual distribution clauses make it possible for your children to learn to support their favorite charitable causes. Make each child responsible for researching an objective and selecting the worthy cause for their portion of the annual distribution. It’s a win-win-win: a tax break for parents, a life learning experience for kids, and a charitable donation for the cause.
Tip #7. Teach your kids they have a responsibility to maintain the family’s wealth.
When you discuss your family’s wealth, how it grew, how you keep what you grew, how you build more wealth, make sure to teach them they have a responsibility to maintain the family’s wealth for more than one generation. Don’t forget to tell them what a difficult task that is, and that they must develop a commitment to the idea.
Tip #8. Talk about pre-nuptial agreements now.
Well, if your kids are under 12, maybe it’s a little early for this discussion. The right time to talk about the value of pre-nuptial agreements is up to you but would seem appropriate in the pre-teen to teen years. That’s when you are instilling the value of maintaining the family’s wealth and teaching about the many tools in the financial toolbox. Your children need not fear such agreements but must understand that family attorneys, accountants, and other advisors stand ready to help them create fair agreements that will help them hold on to the family’s wealth.
Tip #9. Keep discussions age-appropriate.
An over-arching theme to tips 1-8 is keeping the discussions age-appropriate and developmentally appropriate. Only you can decide what that means for your children. The idea, though, is to keep the information at the appropriate level for each child. Whether you decide that means excluding younger heads from discussions with your 14-year-old, is totally up to you.
If you want to read more about this topic, you may enjoy the 2018 article from kiplinger.com entitled “5 Things Your Kids Should Know Before They Inherit Your Money.”