Is there a way that parents can give children money without ruining their lives?
That may seem to be a strange question. Most of us would assume the effect would be just the opposite, that a pile of cash would solve a bucket-load of problems. Yet the issue isn’t that simple. There are a lot of misconceptions and misinformation about inheriting money.
First, receiving a lot of money can certainly have harmful consequences. Studies have shown that 43% of people who come into a large sum of money (whether by inheritance, lottery winnings, or other windfalls) have spent it all within five years. Sixty percent of inherited wealth is completely blown by the heirs, and on average, 90 percent of an inheritance is gone by the time the grandchildren die. Stories abound of those whose lives were literally ruined by inheriting money.
Of course, not every child is going to squander an inheritance. Forty percent—a substantial minority—don’t mishandle their inheritances. I would guess a good number of those kids inherently understand the value of a dollar and have a healthy relationship with money.
Still, how to give away the money and possessions you’ve accumulated over a lifetime in ways that will help and enrich the lives of the recipients is an issue many parents need to consider. This is true even for those who don’t consider themselves wealthy. Life insurance, accumulated retirement benefits, and assets such as a small business or a paid-for home can add up to a larger amount than one might think.
If parents don’t want their children’s inheritances to cause problems for them, what are they to do? Leave everything to charity? That’s exactly what Warren Buffet is doing. The second richest man in the world is leaving little of his billions to his children.
This, based on my experience as well as an ABC report aired by John Stossel last year, is not common. Less than half of people with money to leave bequeath anything to charity. The majority of inheritances go to family members. There are several things parents can do if they want to make sure those inheritances will be used well.
First, have a will. This may seem obvious, especially for the wealthy. But it would shock you to know, in my 30-plus years in finance, how many millionaires I’ve encountered who had no wills. If you want to control the disbursement of your estate, you’ve got to have a will. Otherwise, your state law and a judge will decide who will get what.
Second, begin today to educate yourself about how money works. It’s going to be difficult to give away money in a helpful and healthy way if you don’t understand the basics of investing, money psychology, and the creative estate planning options available to you.
Third, evaluate your children’s money skills. The older they are and the more responsible they’ve been in adulthood, the greater the chance they will use an inheritance wisely. All children are not created equal in this regard. You may do as one of my clients did, which is to leave money outright to the more responsible children while putting funds in trust for those that don’t handle money well.
And finally, explore and improve your own relationship with money. My experience is that most people have a difficult relationship with money—whether they have a little or a lot. Your financial beliefs and choices are what your children learn from. The money behavior you model for them is one of the most important ways you can help insure that what they inherit from you will be a blessing rather than a burden.