The other day someone commented that we spend a lot of time preparing the money for our kids, but we don't spend a lot of time preparing the kids for our money. That statement has stuck with me. A common goal we hear is to leave money behind to their children. People put in the effort to be disciplined with spending, invest wisely, and create elaborate estate plans to protect, grow and transfer their wealth to their children. Over the next few decades, millennials will receive an estimated $68 trillion passed down from boomers, which puts an entirely different connotation to the "OK Boomer" phrase. So just how should you prepare your children for the money? I suggest through thought, education, and communication.
How will receiving an inheritance affect your children?
My son is only 12, but I already know he will always be a kid to me. I think that is how most parents feel. When I am talking about children here, I should clarify; I mean adult children. The average age of a recipient of either an inheritance or a parent's gift while the parent is still living is 49 years old.
Each kid is unique, and you know your kid's uniqueness better than any. Well before they are 49 years old, you should have a good idea about their responsibility. Put some thought into the question above; how will receiving the money affect your children? Do you think they will use the money to change their life for the better? Are they responsible enough for it yet? Is there a chance the money could ruin them? Receiving an inheritance isn't suddenly going to change behavior; I believe it will exacerbate it. People with good habits will put it to good use, potentially improving their finances dramatically. People with bad habits will continue with their bad habits, potentially wasting and putting themselves in a worse position. In that case, you have more work to do to get them ready for money in the future.
How can you educate your children to be able to receive an inheritance responsibly?
A few months ago, my 12-year-old son asked me if it was expensive to have a baby. After I responded, he asked me if I would help him financially when he had his baby. Apparently, I still have a lot of educating to do. It may seem overly simplistic to say, but I believe the first step to preparing your children for a financial windfall is education. We know financial literacy in youth is low overall. Necessary financial skills are not generally taught in schools. More often, those skills are learned informally over time by observing and listening to adults and peers. Realize that you are one of the primary sources of financial knowledge for your children as they are growing up. Talk to them about money, talk about the work and effort you put in to earn it and talk about your decisions on what to do with it. Even without a specific, formalized lesson, you will educate them by letting them in on your habits.
I think many of us often overlook adult education. You can, and should, still try to educate and model behaviors for your children as they become older. When they get their first job, talk to them about their 401(k), what you did right and wrong with your retirement plan when you were their age, and help put them on the right path. Instead of telling them what to do, ask them questions to make sure they think their options through and share your own experiences. Help them learn from the decisions they make. Money values are not transferred all at once; they are transferred over a lifetime. Don't shy away from the opportunity to communicate your money values through education.
How to communicate with your children about an inheritance?
What's a more awkward conversation to have, the birds and bees, or talking about what you will leave them when you pass away? It may be uncomfortable but have the conversation anyway, so they know what to expect. I would suggest making the conversations age appropriate. The younger they are, the more general and obtuse the discussion should be. As they get older and more mature, letting them in on some more details may make sense for both of you.
The idea is to let them know what is possible. Realistically, no one knows exactly how much they will have left when they pass. There are just too many variables, like return rates, tax changes, medical expenses, etc. Us Floridian's understand the cone of uncertainty during hurricane season. The further away from the hurricane, the wider the range of places it may go. The cone of uncertainty also exists when thinking of assets; the further out we are, the more things can happen to change the direction. Talking about those possibilities with your children, both good and bad, will allow you to help them plan what they might do with it. Hopefully, having those conversations makes it less of a surprise windfall situation and more of one where they are mentally prepared for the money.
If you made it through this entire post, there is a decent chance that you are a client of ours. We want you to know that Michelle and I both love the opportunity to talk with our client's children. We often say that your goals are our passion, which is true. That idea also extends to legacy goals. If you are a client of ours and feel we could help either facilitate this type of conversation or just help educate your child with some financial questions they may have, we are more than happy to do so.
This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.