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Will Your Kid's Inheritance Make Her a
Monster? Not If You Plan Carefully
The airwaves are full of cautionary tales of young people
with too much money too soon wretched excess is in, and
responsibility seems, well, pretty boring. And your last name
doesn't have to be "Hilton" for you to worry.
Inheritances, trust funds and other benefits from hard-earned
family fortunes of any size can affect the children of wealthy
individuals in incredibly positive and negative ways.
Most financial experts, such as Certified Financial Planner
professionals, will tell you the best scenarios involve early
planning, solid parenting and complete family involvement from
the start. Here are some suggestions on how to raise a
responsible heir:
Get advice early. If you have created a successful business
or amassed a fortune working for a fast-growing employer, it
makes sense to sit down with tax, legal and financial advisors
to talk not only about the No. 1 goal of protecting those
assets, but passing them intelligently to the next generation.
Because these conversations should go beyond sensible money and
tax management to how these assets will affect your family's
entire life, one of the first questions you should ask is,
"How do I train my kids to inherit this money?" Also,
it's critical that you include the unthinkable in your
discussion how your surviving spouse or designated guardians
will continue this stewardship if you die. You need to make sure
your plan is effective particularly if you're not there to carry
it out.
Start basic money training early. In most households, kids
start learning about money and what it does around age 4 or 5,
even if it's only centered on how to buy a popsicle. Obviously,
your kid might have some idea already that his parents have
money, so you have to strike a balance between the reality of
your fortunate situation and the responsibility training all
kids need no matter what their circumstances. You don't need to
lie about what you have, but when kids are this young, you're
not anywhere near discussing what they may inherit when they're
older. It's not their money anyway. Your job should be to
introduce your kids to chores and a modest allowance to cover
essentials, treats and savings that you'll agree upon. Then
watch closely to see how your kid is learning these skills. This
is the bedrock of how they'll be handling money the rest of
their lives.
Lead by example. If a kid grows up in a house where parents
spend indiscriminately and settle disputes with the kids with
money and toys, chances are the kids will repeat those patterns
as teens and adults. If a kid grows up in a house where parents
set money priorities for themselves, participate in charity and
community service and expect children to do the same, that's a
powerful lesson about wise choices in time and money for a
lifetime.
Do a family mission statement each year. This may get an eye
roll from some family members. But a once-a-year meeting to
discuss what's important in family life is a great mechanism not
only to find out how the entire family is doing with regard to
personal values and goals, but a great way to work in a
purposeful wealth message that expands over time. When children
are young, they should be allowed a vote in how family money is
spent for particular luxuries like vacations, and as they get
older, parents can elect to expand their vote in other areas,
such as general investment policies for the family holdings.
Involve the kids in investment and planning. If a child is
inheriting wealth at a certain age, it is entirely fair to bring
them into the process of the care and feeding of that wealth at
a significantly earlier age, possibly in their early teens.
Before that, it might be fun for them to buy a particular stock
or mutual fund that they can own jointly with you so they can
see how investments perform. Eventually, you can migrate their
attention to their potential inheritance, how that money is
currently invested and what efforts are taken to protect its
principal are essential if they are going to take over
responsible management of those funds someday. Kids need to
understand that wealth needs to be tended to in order to grow
you might even consider bringing them to meetings with your
money managers so they can learn about the process over time.
Raise the suggestion that wealth should stay invested.
Wealthy relatives need to tread carefully here, because if a
young person gets money, they're going to understandably want to
have some fun with it. But it's important to teach the message
that a significant part of the inheritance should stay
responsibly invested so the child can address a personal goal
(advanced education, starting a business, or their own
philanthropy) or have wealth to pass on to their families.
Get them some independent training. The wealth management
industry including financial planners are directing training
resources toward younger clients who may come into considerable
fortunes at a later date. It's to their benefit they want to
keep that business. But if you are already working with
investment experts whom you trust, why not ask them about
training your kids can receive when you're not around? As
adults, they are going to eventually handle decisions on their
own it might be wise to continue their learning in an adult
environment where they can take the lead in a discussion.
November 2007 This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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