Leaving a Legacy of More than Money

“A very rich person should leave his kids enough to do anything, but not enough to do nothing.”

-Warren Buffet, as quoted in a September 29, 1986 interview with Fortune.

An inheritance can be an enormous blessing, and yet, for some, it has been the equivalent of a lottery prize, producing little long-term benefit for the recipient. This makes financial planning to have a baby quite the challenge and the opportunity. An inheritance can be both a gift and a challenge, the challenge coming in two forms: emotional and financial.

The issues raised are nearly endless:

• Should the money be spent, saved, invested, or all of the above?
• How would my parents have wanted me to spend the money, and does that matter now?
• Is the inheritance taxed, and if so, how?
• Does the family feel the division of assets is fair?
• How does one reconcile the loss of the family member with the receipt of the money or assets?
• Who (and how much) should you tell others about an inheritance? (When neighbors notice the windfall, will they start asking for money, as they do with lottery winners?)

And for the parent or parents with the estate, things are no less complicated. Verlyn De Wit, a financial advisor specializing in the dairy industry, takes a hypothetical situation in an article on Planning for Family Harmony: Two sons are running the family business, which require occasional injections of capital improvements, while the two daughters have “married well” and are off doing their own thing. Should the sons get more money than the daughters? What’s a parent to do?

Consider the following tips for parents thinking about their estates:

1. Make certain your own needs are met first.

There are many times when parents may be tempted to neglect their own needs in favor of their children’s. Perhaps they pay for a child’s college expenses, only to become dependent on their children in later years when illness strikes and they have not taken care of their own needs first.

The greatest gift you can give your children is your own independence. In this day of longer life expectancies and “the sandwich generation,” many adults are caring for children and parents simultaneously. As much as possible, take care of your own health and finances first.

One way to do this is to not be in the habit of making promises. Markets shift, business fail, and things change. Never set up expectations that might be unrealistic. (This is also a great reason to use low-risk vehicles such as investments that aren’t market dependent and to utilize whole life insurance – at any age!)

Even with the family home, you should not let your children assume that it will be “theirs” someday. Depending on many factors, a reverse mortgage may make sense as part of your financial strategy.

2. Communicate your intentions to your children.

Atlanta Financial Psychologist Mary Gresham points out that an inheritance combines a double whammy of taboos: Money and Death. However, communication can go a long way to softening the blow. Whether children are inheriting a fortune or (perhaps especially) just the family china, preparing them ahead of time is essential.

Gresham suggests holding a family meeting in which parents tell their adult children of their decisions and allow them to share concerns, input, and feedback. This can help to alleviate later sibling wars as well as anxiety around the unknown. Such a meeting also gives parents a chance to explain why certain options seemed preferable, such as when children are treated differently to arrive at what seems to be a fair and equitable resolution. Communication is also essential when children might assume they will inherit assets that will actually be liquidated to support charities or universities.

Though family meetings are recommended as a modern “best practice,” Gresham points out why some parents are reluctant to discuss estate issues:

Many do not know that it is important to do and it never occurs to them. Many parents perceive the assets to belong only to them and thus they have complete freedom to do as they wish. This ignores the next generation’s feelings that the assets belong to the whole family. In addition, as parents approach the last stage of their lives, they do not want to risk having a child upset with them or alienated from them and believe that keeping inheritance terms secret will preserve their own relationship with their children.

Keeping the contents of a will “secret” rarely leads to a desirable result. Take the opportunity to explain your logic to your children, and allow for feedback, even though they are not making the decisions.

3. Don’t give children grossly unequal shares of the estate.

Sometimes wealthy parents financially coddle an adult child who struggles financially, and whether the financial assistance is handed out in life or in the form of an estate, the assistance is often counter-productive. Coining such family gifts “Economic Outpatient Care” (EOC), Thomas Stanley spends an entire chapter of Millionaire Women Next Door how such “Intrafamily Gifts of Kindness” tend to only make those who repeatedly receive them less and less able to provide for themselves.

Unfortunately, those who seem to need the most assistance during their parents’ lives also tend to get the lion’s share of the estate as well. Don’t punish financially successful children by decreasing their inheritance. For many children, their drive to succeed is fueled at least in part to please their parents. Decreasing the inherited share of a successful child is a crushing blow to the over-achiever.

You also want to consider family dynamics. While many parents insist that their kids get along just great, things change when parents die and property is going to be distributed… especially unequally.

4. Leave your children with the greatest gifts possible: Financial knowledge, confidence, and parental role models who lived prosperously.

Make learning about how money works a lifelong family affair. Give your children financial responsibility when they are young, and include them in planning vacations, college, and other expenses. Even if you’re no Warren Buffet yourself, include them as you are learning yourself about saving, investing, or growing a business. And practice communicating about money long before you ever need a family meeting to discuss estate details.

We’ve all seen the shirts, “I’m spending my children’s inheritance.” We laugh, but a true legacy is one that can’t be spent on a cruise ship or in Vegas. Leave your kids the kind of legacy that Robert Kiyosaki discusses in Rich Dad, Poor Dad, the kind that will leave heirs well on the road to being able to generate their own lasting wealth, not wondering if they should invest or spend a one-time windfall. For more ideas on wealth management, read our Ultimate Guide to Financial Planning Myths. 

Do you or your children have questions about your investments, insurance, or other financial instruments? Perhaps it’s time to include them in meetings with your financial professionals. We’d love to meet your family members, and help you help them feel informed and prepared. Call us at (877) 889-3981, ext 120, or contact your own Prosperity Economics Advisor today.