One of the great satisfactions of achieving financial success is the knowledge that you can provide opportunities to your children that you never had. But leaving them a large fortune can be a double-edged sword. It’s a cliché that the children of self-made men and women have no respect for the value of dollar — but it’s a stereotype that seems to be based in human nature.
These concerns are the reason why many magnates, including Warren Buffett and Bill Gates, won’t leave their vast wealth to family. As Buffett famously put it in 1986, the perfect inheritance is “enough money so that they would feel they could do anything, but not so much that they could do nothing.”
But inheritance is a notoriously sticky issue, and it can be very delicate attempting to give your children the gift of responsibility along with your financial gift.
If you’re thinking of leaving your children a large inheritance here’s what you need to consider.
Set Realistic Expectations
Something about the possibility of inheriting a large amount of money can bring out the worst in people, which helps explain why there are so many ugly family squabbles after someone wealthy dies. The real issue is the unmet expectations of the heirs.
In families like Warren Buffett and Bill Gates, the children already know what’s in store for them. They know how much they will receive, and why.
Unfortunately, not every family works that way. According to Roxanne Roberts of The Washington Times, “a lot of people don’t like to talk about money because they don’t want the kids to know how much they’re actually worth or what they might inherit.”
Parents who keep mum may think that less information will keep their children’s expectations low, but things rarely work that way. It’s more likely that the kids will dream big about their inheritance, and then behave badly when they are disappointed.
Use Trusts Strategically
A common way of letting your children have their cake and eat it too is to set up trusts to promote responsibility. For instance, many trusts will distribute an inheritance once the child reaches predetermined ages.
One family appointed trustees who will only release money from each child’s $2.5 million trust for education, health care, a home purchase, or a business start-up until the children reach age 40. At that point, the money is theirs free and clear.
Other inheritances are set up as “incentive trusts,” with provisions requiring anything from graduation from college, to marriage, before money is released. These types of trusts offer parents a sense of control (from the grave), but they are full of loopholes and can still make family relationships very fraught.
But putting your money in some sort of trust, particularly if you have minor children, can help ensure that your kids will still be able to take advantage of opportunities you would give them even after you are gone.
The Bottom Line
Not knowing how to disburse your great fortune is the definition of a good problem to have. But money has a way of souring relationships and demotivating recipients. Communicating your intentions clearly, both directly to your children and through the use of a trust, is the key to keeping the gift of an inheritance from becoming a curse.
Do you expect to receive a large inheritance? How has it affected your family?