Over the next 15 to 30 years, roughly $30 trillion dollars of wealth is estimated to get passed down in inheritance from Baby Boomers to their adult Millennial children. That’s a ton of money and assets changing hands. Close to 30 percent is estimated to move between 2031 and 2045.
If you’re planning of giving your children an inheritance, you likely want to do so in a way that won’t make them suddenly turn into lazy, spoiled brats. You’ve worked hard to build your wealth and raise your kids – the last thing you want is for them to start believing they are entitled to anything and everything and are better than everybody else.
Of course you want them to live comfortably after you’re gone, especially if you were to pass prematurely. But it's a top priority for them to stay motivated and continue working hard themselves, continually appreciate what they have, and not take anything for granted.
Easier said than done? Although that's the case with a lot of things when it comes to kids, you can give your kids an inheritance and still keep them motivated with the following steps.
1. Educate your children about money management at a young age
The sooner you can get your children interested in money, investing, and building wealth, the better. Most schools are not required to teach lessons on personal finance topics and that needs to change. Don't wait until your kids are grown adults to have conversations about money.
Kids are often quite fascinated with money and how to get more of it. Take advantage of their young curiosity! Talk about budgeting, inflation, the importance of retirement planning, the power of compounding returns, and the opportunities that come with financial independence. Share some of the lessons you've learned about managing your own money and don't be afraid to talk about your failures too. Help them learn from your mistakes so they don't have to make the same ones. Encourage them to make contributions and invest proactively throughout their lifetime as well.
2. Talk openly about your financial health
A lot of people hate talking about money and avoid bringing it up, especially with family. It doesn't have to be an uncomfortable or awkward topic, however. There are a lot of benefits of opening up and getting everyone in the family on the same page by discussing your financial status.
Remember, you have full control over the level of detail you want to divulge. If you're not comfortable sharing specific like your take home salary or your net worth, focus on the general health of your finances.
If this will be your first time talking to your children about your financial status, prepare to be asked many questions. You can think about how you want to answer questions like the below beforehand.
- When do you plan to retire and how much do you have saved up?
- What's the balance on your mortgage? When will it be paid off in full?
- How much credit card debt do you have now and in the past?
- What's your net worth and how is it allocated?
- Do you have a will or a trust?
- Am I getting an inheritance? When? How much?
- When did you start saving and investing?
- What are your biggest wins/losses?
- Did you get an inheritance from your parents?
3. Explain how you got to where you are today
A common trait of the wealthy is a strong work ethic. Encourage your kids to work hard so they can reap its rewards. Help them understand the importance of hard work by explaining to them how you were able to accumulate your assets. You can talk about the hours you put in, the challenges you faced, and the sacrifices you made as well.
In addition, talk about the incredible feeling of fulfillment and accomplishment that you experienced with important financial milestones in your life. For example, paying off your college loans, getting a raise, the first year you maxed out your retirement account contribution, buying your first house, etc. True stories can make a great impression and bring you and your children closer together.
4. Figure out if certain assets mean more to your kids than others
If you have a lot of assets, it's beneficial to know if certain assets mean more to your kids than others. For example, one of your children may be most interested in collectibles and jewelry and another may be most interested in property. This could impact how you write your will or trust. Due to sentimental reasons or other interests, one or more of your children may prefer not to have an equal share of a particular asset in order to have more of another. The better you know their needs and interests, the easier it will be to gain their support and pass down an inheritance in the most meaningful and efficient way possible.
5. Be clear that your financial status might change
There are no guarantees in life and what's worth $1 million today could be worth half that in the future. Hopefully your assets will continue to grow before you pass, but make sure your kids understand that assets and investments change in value over time. Plus, there's always the chance an emergency situation could arise in the future that could negatively affect your financial health and net worth. Recognizing this should help your children stay more motivated and appreciative.
6. Get your documents in order and inform your kids
If you have accumulated a sizable net worth, I strongly suggest hiring an estate attorney to help you create a trust for the inheritance you wish to give your children. At the very least, prepare a will. Once you complete your documents, make sure your kids know the contact information of your attorney, what type of documents you have and where they are stored. This not only gives you peace of mind, it will help them too. Knowing who to call and where to go can help reduce stress and the loss of assets if something unexpected should happen to you.
7. Clarify any inequalities
If there are any assets that you don't plan to bequeath equally amongst your children or exclude, it's important to explain why to avoid feelings of resentment and jealousy. You can have private conversations or put your reasoning in writing or a video recording. If you don't plan to divide assets equally, it's best to decide on how they will be distributed in advance. Your trustee or the child designated to divide up your assets after your gone may not distribute your wealth the way you want if you don't provide specific instructions. That's not something you want to leave up to chance.
8. Utilize a phased distribution schedule
Consider transferring your wealth in phases per a set schedule or specific terms. Estate attorneys can help you get documents in place that clearly define when certain assets can be distributed based on age or other circumstances. This can help tremendously with avoiding reckless behavior so your children won't waste their inheritance or spend it all in one go. You can also make specific rules that prohibit a child from receiving any distributions if they are abusing substances, have engaged in criminal activity or are otherwise unfit.
9. Use as many tax exemptions as possible
In 2018, the federal estate tax exemption is $11.18 million per person, a significant increase from prior years due to the December 2017 tax overhaul. Thus, married couples can take advantage of $22.36 million in tax exemptions. In addition, the 2018 federal annual exclusion for gifts is $15,000. There is no limit on how many people you can gift and couples can each give $15,000 per individual. That means each of your children can get $30,000 from you and your spouse combined.
Also note the step-up function with your assets that get passed down. Essentially, when you pass away and an asset is transferred to an heir, the cost basis is based on current value, not your original purchase price. This can reduce the amount of capital gains tax your children have to pay. For example, if you bought a house a long time ago for $100,000 and it’s worth $1,000,000 when you die, the cost basis is $1,000,000. If your children later sell the house for $1,500,000 their capital gains would be based on $500,000 instead of $1,400,000.
Give Yourself A Pat On The Back
The fact that you're reading this post and are building an inheritance that you want to pass down to your children and still keep them motivated is worth celebrating. Growing wealth is hard work and parenting is even harder. Your kids are lucky to have you!
The more you teach your kids about growing wealth from an early age, discuss your financial health, explain how you got to where you are today, and understand your children's needs and interests, the more likely they will be motivated to do the same. Just because your kids find out they could get an inheritance someday doesn’t mean they'll turn into different people overnight. You know them better than anyone else and can help them appreciate what they have, teach them how to save, invest, and take advantage of the opportunities that come from hard work and financial independence.
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About the Author: Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $200,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom.
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