If you've amassed a decent amount of wealth, you will likely want to leave some of it to your children. Let's discuss some inheritance tips so we don't screw up our children. Every financially-responsible adult who builds great wealth fears demotivating their kids.
One of the reasons why my 31-year-old neighbor still lives at home with his parents is because he expects to inherit a boatload of assets. His parents' home, alone, is probably worth about $2.6 million.
The great thing about my neighbor's living situation is that his parents only come to visit during the weekends. His parents have another home in the North Bay. He also rents out one of the rooms to his friend.
By continuing to live rent-free in his parents' house, my neighbor is not only saving a lot of money, but he's also laying claim to his future assets. When his parents eventually pass, surely the house will go to their by then 50+-year-old son who has been living in the home all this time. He is withdrawing from The Bank Of Mom & Dad with fury!
However, despite being in a position to inherit millions, my neighbor doesn't seem to be progressing in life. Although he graduated from college in 2015, he still works at a dead-end job. He's not in a relationship either. Instead, he's used much of his disposable income to buy and maintain two cars and two noisy motorbikes.
It would be one thing if he was cheerful and happy every time we cross paths. However, he never says hello and always seems angry.
One time, I was walking down the sidewalk pushing my baby daughter in her stroller. He decides to pull out one of his vehicles and block the sidewalk. He sees me, but doesn't say hello.
I stop to play with my daughter, assuming he would continue driving his truck into the street or reverse back into his driveway so we could pass. We wait for three minutes. Nothing happens. Instead, he decides to get out and leave his car in the sidewalk. Nice.
If I was his father, I would be concerned. As a parent, all we want is for our children to be happy and independent. I'm afraid that if we can't teach our children social skills or develop their emotional intelligence, then some of us will decide to just throw money at our children.
Millennials Are Going To Be The Wealthiest Generation
For all the talk about Millennials getting financially screwed over by Gen X and the Boomers, the Millennials seem to have it pretty good. Millennials get to benefit the most from their parent's prodigious wealth accumulation without having to do much on their own!
By 2030, Millennials will have inherited roughly $68 trillion dollars of wealth according to one study by the real estate brokerage, Coldwell Banker. I've seen the figure range from $38 trillion to $68 trillion. Whatever the real inheritance number is, Millennials will be inheriting a crap ton of money!
If you’re planning on leaving your children an inheritance, you likely want to do so in a way that doesn't turn them suddenly turn into lazy, spoiled brats. Instead of thinking you own the sidewalk by blocking it with your car, you move so the baby stroller doesn't have to go into the streets.
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. Don't let them start thinking they are better than everyone else!
Of course, you want them to live comfortably after you’re gone, especially if you were to pass prematurely. However, that's also what life insurance is for.
For you, it should be a top priority that your kids stay motivated and continue to work hard for themselves. Don't squash their motivation to earn and be somebody by giving them too much money.
Easier said than done? Although that may be the case with a lot of things when it comes to our children, you can still give them an inheritance and still keep them motivated with the following steps.
Inheritance Tips To Not Screw Up Your Kids
“Money isn’t everything, but it sure keeps you in touch with your children.” – J. Paul Getty
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, which is a shame. 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 curiosity! Talk about budgeting, saving, 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.
Given so many of us are stuck at home nowadays, we've got a great chance to talk to our kids about money.
If you're busy working and your kids want to play, you can tell them that you need to work to make money. What a great way to explain to your kids how you need to make money to pay for the food they eat. Perhaps you can tell them that you hope to one day make enough money so you can play with them whenever they want.
2. Talk openly about your financial health
A lot of people hate talking about money, especially with family. It doesn't have to be an uncomfortable topic. The benefits outweigh the cons.
You have full control over the level of detail you want to divulge. If you're not comfortable sharing specifics like your salary or your net worth, focus on the general health of your finances. Share with your kids the reasons for your financial goals.
If this will be your first time talking to your children about your financial status, prepare to be asked many questions. Here are some for your preparation.
- 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
Perhaps you worked extraordinarily long hours when you were young. Maybe you took on two jobs and went to night school to save enough for a downpayment. Or maybe you worked on a side hustle for three years at night while working a day job.
Your kids will want to hear about your career and work origins! They will want to know how you got to where you are today. Your kids want to know what type of sacrifices, if any, were made to achieve your goals. Giving kids perspective is one of the best inheritance tips.
There are only a couple things we can really control: 1) our attitude and 2) our work ethic. Therefore, it's best to instill in our children these two traits as early as possible before they go out on their own.
In addition, talk about the incredible feeling of fulfillment and accomplishment that you experienced with each financial milestone reached in your life. Discuss how it's much more rewarding to create something of your own or buy something with the money they've earned.
The main reason why I chose to attend The College of William & Mary for $2,800 a year instead of attending a private university for $20,000+ in 1995 was that I knew about my parents' background. I also learned about my great grandparents' struggles coming to America.
I knew what sacrifices my mother had made and how she wasn't very happy at work. As State Department workers, I also had a good idea of how much money they made. As kids, we are very observant of how our parents feel after they come home from work. I remember many days of frustrations.
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. Another may be most interested in the childhood home he grew up in. Knowing your children's interests can help you better write your will or structure your revocable living trust.
Dividing assets up can be tricky. Talking about inheriting assets is also awkward. But it's worth having these discussions today, while still alive. Have the conversation over a nice meal and a glass of wine. Keep it light-hearted. As parents, you should be able to discern what your kids prefer. After all, you've known them their entire lives.
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
Hopefully, your assets will continue to grow before you pass. However, as we all know, bad things can happen all time. There seems to inevitably be a financial crisis every 10 years as cycles shorten. Maybe next time around, there will be an asteroid that lands on Earth, carrying with in a new type of disease. Who knows.
Make sure your kids understand that your assets and investments may change in relative value over time.
In any case, it would be a shame for your kids to depend on a financial windfall to fund their financial goals and dreams. Instead, make sure they spend time focusing on achieving their own financial goals without relying on your assets. Don't let your kid turn into my neighbor who has no direction.
Just be clear that your financial situation may change over time. Maybe you have a health issue that is expensive to cover. Or maybe your investments will get rocked due to some random exogenous variable. Bad things happen all the time.
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 revocable living 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 you're 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 are to be distributed based on age or other circumstances. This can help tremendously if you are concerned about reckless behavior. You don't want your children to squander your wealth.
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 2022, the federal estate tax exemption is $12.06 million per person, a significant increase from prior years. Thus, married couples can take advantage of $25.12 million in tax exemptions. That is a hell of a lot of money! However, the stepped-up basis loophole might be eliminated, so beware.
In addition, the 2022 federal annual exclusion for gifts is $16,000. 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, let's say you bought a house a long time ago for $100,000 and it’s worth $1,000,000 when you die. The cost basis for your children is $1,000,000 not $100,000. The value is “stepped up.” If your children later sell the house for $1,500,000 their capital gains would be $500,000 ($1,500,000 – $1,000,000) rather than $1,400,000 ($1,500,000 – $100,000).
Inheritance Tips Conclusion
The fact that you're reading about inheritance tips is worth celebrating. Your kids are lucky to have such a thoughtful you! You've worked hard to provide for your family. Now you want to make sure your kids lead comfortable lives after you're gone.
How much you want to leave your children is up to you. In general, I think leaving up to the estate tax threshold limit is a reasonable guide. Leaving any more will face a ~40% estate tax, which is a waste of money. If your estate is on pace to surpass your estimated estate tax threshold when you pass, I encourage you to spend more money while living.
I've always been afraid of raising spoilt and lazy kids. Maybe the reason for my fear is due to having seen some of my middle school and high school friends waste their lives, despite having so much wealth and opportunity.
However, due to three years of coaching tennis at a private high school, I've gotten to know some children from wealthy families. Most are respectful kids who take instruction well and practice diligently. However, there are always 1-2 kids who would benefit from more discipline. But that's probably true in all socioeconomic groups.
The more we teach our kids about the complexities of money at an early age, the better. We should not make money a taboo topic in our households. Spoiling our children is a fear as we get wealthier. However, I've come to the conclusion the fear of making our kids rotten with money is overblown.
As caring parents, we will have taught our kids the importance of hard work, saving, and investing. Further, by the time we give our children money in their late 20s and beyond, they will have experienced the hardships of life already.
Let's Keep Talking About Money
I truly believe our kids will better appreciate the value of money if they know how their parents made it.
If money is just too difficult a subject to talk about, here's my final suggestion: Send your children an article about inheritance tips and other financial topics you'd like to discuss.
Children sometimes don't want to listen to their parents. If the money advice is coming from someone else with the relevant experience, maybe your children will have an easier time listening.
Print out an article and discuss the topic during your next family meal. I'm sure you'll have some great moments of discussion.
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Readers, are you planning to give your children an inheritance? If so, how much? How much inheritance is too much? I'd love to hear more inheritance tips from all of you. Inheritance Tips is a FS original post.
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