How to Responsibly Leave Money to Your Children
Knowing whether or not to leave money to your children isn’t as simple as it may seem.
According to a recent study conducted by The Motley Fool that surveyed 2,000 high-net-worth individuals, 67 percent of millionaires are worried about leaving their children too much money. The survey mostly found that parents worried that money left to heirs would be used irresponsibly, beneficiaries would not be prepared to manage it, or it would make their children “lazy.”
These findings echo many of the same concerns I hear regularly. It’s not that the affluent don’t want their children to succeed; it’s that they don’t want the inheritance of money to cause harm.
So, what should you do as someone who has accumulated a large sum of money? Do you leave it to your children? If so, how much?
Here are the top 5 questions you need to answer with your children to create a positive transfer of wealth over your lifetime if you intend on giving some to your children.
1. What does money mean to me, and what is its purpose?
You earned your money. Therefore, you know just how much effort it takes to create generational wealth. When children are born into money, money has always been there for them. They can lack perspective on how hard you have to work to achieve a certain level of prosperity, and they can be naïve to how quickly it can all vanish from poor decisions or unpreparedness.
For this reason, be sure you have a clear explanation of what money means to you, what it took to earn the money you have, and the purpose you see for it. Then and only then can you communicate your money values to your children. The chances are high that money is a byproduct of a risk you took, a passion you followed, or a goal you worked hard to reach. Money is the reward and the proof of a relentless pursuit of something significant to you.
2. What are my biggest goals for my money for my family?
Your money has a purpose. What is it? And more importantly, do your beneficiaries know what it is?
Leaving money to your children outright may or may not accomplish the goals you have for your money or how you wish to support them into their future.
There are other ways you can put your money to work to benefit your children that don’t include a direct transference of wealth. Maybe your money is better off getting reinvested into your business that you plan for your child or children to take over one day. Perhaps you want funds to go toward the education costs of your future grandchildren so you can support quality education among your family members for generations to come.
When you have more money, you have the freedom of choice that comes with it and how you want to spend it in your lifetime and beyond.
3. Why am I leaving money to my children? For what purpose?
Contrary to popular belief, the latest finds that most millionaires do not inherit their wealth. In fact, roughly 80 percent of millionaires in the United States of America are first-generation, meaning they earned their millions mainly through entrepreneurship. Furthermore, it’s worth noting that only 16 percent of today’s millionaires inherited over $100,000, and just 3 percent inherited over $1 million.
If you weren’t a recipient of wealth, you’re in good company. And if you don’t plan to leave a huge inheritance to your children, you’re most certainly not alone. If you plan to leave money to your children, know its purpose, and then the dollar amount can be more defined. For example, perhaps you want to give your child enough money to start his own business or buy their own home.
In most cases, when my clients leave money to their children, it is a way to help them to help themselves so they can create their own prosperity.
4. How can my children show me that they are responsible and ready for a monetary gift?
Unacknowledged expectations can lead to resentment if you’re not careful. That’s why you must be honest with yourself about your expectations if you give a significant monetary gift to your children.
If you want them to make good choices with the money, what choices do you hope they make? Let them know in no uncertain terms what you want them to do with the money you leave them. If you never express your wishes or intentions for giving the money in the first place, you may be disappointed.
If you’ve always given money to your children to spend any way they please on anything they want, they are almost guaranteed to continue that practice even with a large sum of money. If you want them to steward the wealth and preserve it, show them how first. Then wait until they demonstrate a keen understanding and commitment to managing wealth responsibly before you give them a larger sum.
5. What are your children’s expectations and fears about money, and what can you do to help shape these expectations and fear?
Learn what your children’s expectations and fears about money are as well. Chances are they have expectations, too, even if they haven’t been forthcoming to share them with you.
Knowing what fears your child may have about taking over a large sum of money is an opportunity to address those concerns and teach them skills they need to succeed.
To get to the heart about what your children may be thinking and feeling about money, have a productive money conversation. To do that, observe these five elements to set the stage for a good and positive money conversation:
- Set the stage properly, which means – invite a conversation, not demand a confrontation.
- Ask good, open-ended, curious questions – and listen intently to your child’s responses.
- Be open and honest about your intentions, expectations, and concerns, and theirs.
- Confront your expectations and expectations of others before having a money conversation.
- Have a goal for this conversation and don’t get wrapped up in emotions or extraneous details.
It’s not the act of leaving money to your children that can present a problem. When there are uncommunicated expectations with the money you intend to leave, it can present discord and misunderstanding. However, careful planning and preparation go a long way to helping you responsibly leave money to your children and create generational wealth that can last lifetimes.