Is Leaving a Fortune to Your Kids a Gift or a Curse?

by Emily Guy Birken · 6 comments

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 the dollar, but it’s a stereotype that seems to be based on human nature.

These concerns are the reason why many magnates, including Warren Buffett and Bill Gates, won’t leave their vast wealth to heirs. 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 attempting to give your children the gift of responsibility along with your financial gift can be very delicate.

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.

Make Things As Clear As You Can Before You Past

I’ve heard of a distant relative whose family ended up suing each other because certain members of the family thought they owned property that just isn’t legally theirs. They are a family of seven kids, and two of the heirs were living in houses that were under the deceased mother’s name. Normally, it stands to reason that those houses are part of the inheritance and the properties should be evenly divided amongst the even heirs. However, the two houses have been bought decades ago with a mortgage that the kids have been paying into all their working life. The two kids and their family spent 30 years paying off the mortgage. They have also lived in the house for almost 40 years. Who should own those houses?

It’s sad to see them suing each other and end up spending thousands of dollars on lawyers. It’s even sadder that those lawsuits are tearing the sibling’s relationships apart. But what can they do when things are clear as mud and everybody has a reasonable claim to the properties and they couldn’t agree on what’s fair? It’s water under a bridge now but the deceased parents could have saved the family by clearing everything up while they were still alive.

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.

For example, a family can appoint trustees who will only release money from each child’s $2.5 million trusts 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 the 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.

It’s better than nothing not having one though. 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 trusts, 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?

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{ read the comments below or add one }

  • Caroline Joanna Mary Bowman says:

    The thing with inheritance is that if it’s first generation, and you know how hard your parents (or maybe grandparents) worked and sacrificed, it makes it quite a responsibility as well as a blessing. I have been incredibly fortunate to inherit a decent amount and it has definitely allowed my family and I to do and have things we have not ourselves earned. Nothing outrageous, but even so. Our goal is to preserve and grow that money, at least some of it, for the benefit of our children, their education primarily, but to give them advantages that would have incurred big debt under other circumstances.

    It’s a privilege and I never lose sight of that. Saying that, if I could have my mum and my dad back for even an afternoon, I’d give it all away to the next person who walks past, with no hesitation. Since that isn’t an option, having been left a generous inheritance is a blessing indeed.

  • Steveark says:

    The thing most people don’t recognize is that typically you are already in your fifties when you inherit money because the last surviving parent will almost always live until their eighties. Nobody is going to waste their life waiting on an inheritance they won’t get until they are nearly retired. I inherited a million dollars in my fifties. It didn’t change a thing, I had my own millions by then. My kids will inherit much more, but they’ll be on their own for decades before they do.

  • Tyler Olson says:

    I’ve personally seen inheritance ruin a child’s upbringing and eventually career. Most children and teenagers don’t understand the implications of their inheritance and end up squandering it away anyway.

  • freebird says:

    I believe responsibility is not something that you can either gift to a child or purchase for money, instead I think it’s a by-product of a good upbringing and is unaffected by financial situation.

    My heirs will be getting enough to do nothing if they choose to live modestly. But they are now preparing to multiply the family legacy, and I fully expect them to accomplish this.

  • Brian says:

    No large inheritance here. I think the best things you can do it talk about it beforehand, so your children understand your wishes and what they will be receiving. Also making sure they are educated in the ways of money. If the don’t know how to handle money in the first place and are handed a lump sum, it most likely not going to end well.

    • Caroline Joanna Mary Bowman says:

      Agree completely. It’s best to have a clear, unambiguous will, to which all concerned people are party, the reasons for how the estate is divided, what the intentions are and all with total clarity.

      It’s best also to NOT give a very young person a huge lump sum with no gatekeepers.

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