I was playing tennis with a friend who happens to be a partner at a large mutual fund company. During warmups, we got to talking about what is the right amount of money to leave our children.
I told him the right amount of money to leave our children is enough so that they'll never starve, but not enough that they'll completely lack motivation to make their own money.
He agreed with my statement. However, where we disagreed was on the amount of money to give and leave our children.
My friend used the example of what if his son wanted to be a college professor. His son would “only” make about $150,000 a year, which might not be enough to raise a family if his son's spouse didn't work. As a result, he feels that setting up a trust worth $10 million was the right amount.
My instinctive reaction was that $10 million is way too much money. Surely, that amount would spoil his son rotten. But I shrugged off his belief and we started to hit.
After our session was over, however, I started to think more about this subject. Let's discuss further what is the right amount of money to leave our children so they don't become spoiled, entitled, and lazy!
Leaving Our Children Money
One of the big points of contention about the Financial Samurai Safe Withdrawal Rate is whether one should spend all their money before they die or leave some money for their children and charitable organizations.
There is no right or wrong answer. Just different answers depending on your financial circumstance, family situation, and what you believe in.
If you don't have children, then generational financial planning is probably not relevant, unless you have nieces and nephews you adore.
If you have children and believe in leaving money to your children and/or to charitable organizations, you won't find it absurd to amass a net worth equal to 200X your annual expenses.
200 years worth of expenses covers the remainder of your life and perhaps two additional lifetimes after you're gone. Every person I have met who regularly donates money has thought about making their wealth last way beyond themselves.
Leaving A Legacy As A Default Assumption
One thing I realized after reading all the feedback in my proper withdrawal rate post is that not everybody has the same default assumption on the passing of wealth. I call this the Legacy Retirement Philosophy vs. the YOLO Retirement Philosophy.
For example, when I was in high school I just assumed I was going to college because that's what all my friends did. I didn't realize I had a choice not to go, unless I wanted a whipping. But the reality is that less than 40% of Americans have college degrees.
I also assumed, since having children, that I would always leave some amount of money to them when I die. Life can be full of hardship. It's easy to see hardship after growing up in Zambia and Malaysia as a kid. Trying to protect my children from extreme hardship is one of the main reasons why I have all sorts of insurance, including life insurance.
This type of default thinking comes from a place of privilege and my socio–economic surroundings. I'm privileged to have enough money to think about estate planning. At the same time, I'm also surrounded by friends who will all be leaving some amount of money to their children when they die.
Perhaps you are too, which is why you're reading this post. I also think it would be great to provide a perpetual giving machine to charitable organizations you care about.
You may not have enough money to put your family's name on a university building to buy your child's admittance. However, how neat would it be for your trust to donate $1,000 a month to a couple of charities you care about for a couple of centuries?
I'm personally excited to figure out a way to do just that. But enough about charitable organizations. Let's talk about the right amount of money to leave our children so they don't turn into zombies with no direction.
The Right Amount Of Money To Leave Our Children
As a parent, there's probably nothing sadder than seeing our children fail to launch. We want our children to find happiness in their careers and as individuals. We want them to find love!
For over six years, I've been reminded about the sadness of failing to launch each time I see my neighbor's son, who was given everything. He took the super-duper senior route of graduating from college in six years. Now, at 30 years old, it looks like he'll be living with his parents for life.
Giving our children money may increase their failure to launch. If we solve the problem of them living at home by buying them a house, do they end up doing nothing since they got their home for free? Such conundrums!
Let's talk about various levels of money to give our adult children while we are still alive. Then we'll discuss the right amount of money to leave our children once we are dead.
Again, there is no right amount of money to give or leave our children as the decision is personal. However, we can come up with a framework to help us make more rational decisions.
Giving Our Children Money While Alive
Giving money to our children feels better while we are still alive. While we are alive, our adult children will likely also need more financial help from us.
Further, there's a balancing act between how much to financially support our children while also supporting ourselves in retirement. Therefore, focusing on the right amount to give our children while we are living is more important than after we are dead.
Up To $16,000 A Year
Giving our adult children up to $16,000 each year is a great way to decrease the value of our estate. The $16,000 is called the annual exclusion amount (from your estate). Ideally, you don't want to leave any money above the estate tax threshold, otherwise, your estate will end up paying a ~40% death tax on every dollar above the threshold.
I think giving up to $16,000 to an adult child every so often is fine. However, if you regularly start giving the annual exclusion amount, your adult child might come to expect it. Once they expect the annual gift, they'll stop appreciating it as much. They will rationally bake in the annual gift as income.
Therefore, it is best to limit the annual exclusion gift amount to no more than once every three years. With this cadence, you get to help while minimizing entitlement.
Up To $32,000 A Year
Given the annual exclusion gift amount is per person, two parents can give a total of $32,000 a year to their adult child.
Once you start giving $32,000 a year to your adult child, you run the risk of him or her slacking off. Most single individuals can live off $32,000 a year, especially if they can live rent-free in their dad's basement.
Therefore, I recommend only giving the double annual exclusion gift amount once every six years to prevent spoilage. This is consistent with giving your child the annual exclusion gift amount from only one parent every three years.
If you have young children, funding their 529 plan for private grade school and college every year is a great way to give money to your children. After all, one of a parent's main responsibilities is to provide their children the best education possible.
Lump Sum For A House
The annual exclusion gift limits are enough to buy a median-priced car. The money will surely help with rent, food, and clothing. It's enough to help with graduate school tuition as well.
However, if your adult child wants to buy a house before 30, then the annual exclusion gift amount is likely not enough.
Given there is so much variation in housing prices across the country, let's assume the lump sum gift amount is equal to a 20% down payment, whatever the house price.
If your adult child follows the 30/30/3 rule for home buying, paying for a 20% down payment should still be safe. This is because if he does follow the rule, then he will still have to come up with a 10% buffer and make enough money to satisfy the other two parts of the rule.
If he doesn't or can't, then I recommend you delay providing all of the 20% down payment. Give your child more time to make more money. Otherwise, you run the risk of your child always asking you for more money. You also take away all sense of pride for independent living.
Money Beyond Housing
After you've paid for their education, provided a down payment for a house, bought them a car, and given the occasional gift tax exclusion amount, giving your adult child even more money becomes riskier. Heck, giving all this stuff already is already red-lining your risk-o-meter.
Remember, you're trying to prevent your child from becoming completely unmotivated in life. You want them to achieve happiness by letting them earn their reward. Let them struggle making a minimum wage service job as an adult. You want them to appreciate the value of a dollar.
Therefore, once the above conditions are met, it is my opinion that no more money should be given to your adult child until after your death. Whatever excess money you do have should be spent on yourself or on charitable foundations.
That said, I think the fear of spoiling our children when they are adults is overblown. If we are giving tens or even hundreds of thousands of dollars to our children when they are in their 30s and up, we shouldn't worry. They have already experienced the hardships of life. Further, they've already developed a lot of their financial habits already.
Giving Our Children Money After Death
Hopefully, for most of us, by the time we die, our children will already be wise adults who have figured out how to live independently.
Receiving an inheritance when you're 50+-years-old is probably not going to change your money principles, no matter the amount. Your children will likely stick to their same old habits.
Think about Warren Buffet still living in his same old house from decades ago. Think about how your parents are still going to their favorite early bird special buffet, despite amassing a nice nest egg after decades of investing.
Therefore, I think it's OK to give each child up to the estate tax threshold upon death. In your will or revocable trust, make sure you share your views on how you wish the money to be spent. Then realize whatever they do with their inheritance is really up to them. If you raised them right, they'll make you proud.
If you find yourself fortunate enough to have way more than the estate tax threshold, then actively try and spend more money on a better life. Feel free to also identify charitable institutions that could use your support.
Of course, if you find your estate to be large and the estate tax threshold to be too low to give to any one individual, it'll be up to you to figure out how to divide your estate between individuals and institutions.
Your child could end up being a multi-millionaire on her own. Therefore, you may not need to give anything to her when you die.
Creating Charitable Trusts
Once we have ensured that our children will always have a home, a good education, and not starve, we shouldn't feel obligated to give them any more money.
Let us not rob them of the glorious feeling of making something of themselves. If they are planning on having children, we can then make further estate plans when the time comes.
There are plenty of people who need way more help after we've provided the basics for our children. Creating trusts for charities seems like the much wiser use of our estate.
Let's use my example of donating $1,000 a month to a couple charities forever. I care about a foster youth center and a disability rehabilitation center in my district. The innocent are those who I'd like to help the most.
Therefore, to provide $12,000 a year each in annual income using the 4% return would require me to earmark $300,000 to each organization.
However, just eyeballing the $300,000 figure doesn't provide me much confidence that it will be properly managed and invested to last 25 years. I can envision the $300,000 running out within 10 years.
Therefore, I will likely allocate at least $600,000 to each institution, which would be equivalent to having a 2% withdrawal rate. This means I'll probably have to save and invest for another 10 years.
So you see, another way to use the Financial Samurai Safe Withdrawal Rule is as a smell test. The Rule helps you decide whether the amount of money you are thinking of giving will achieve its intended results.
Have Children And The Money Will Come
What I've learned so far about parenthood and money is that if you have children, the money will come. Even though children are expensive, once you have children, you will spend more energy trying to save and make more money.
Because you love your children so much, you will do everything you can to ensure they are loved and taken care of financially.
Eventually, you'll get to the point where you may start wondering how much love and money is too much. You may also wonder when is it time to let them fall and learn from difficult experiences.
I hope this article has given you a better idea of what is the right amount of money to give our children while alive and leave after death.
Only we as parents know our children best and must make our decisions accordingly. Personally, I'm building a rental property portfolio and an online business to provide for my children.
My hope is that when they grow older, they will find some appreciation in one of these businesses and take one or both over.
Diversify Your Investments Into Real Estate
Instead of giving your money physical real estate, considering leaving your children passive real estate investments instead. Further, if you want to dampen volatility, diversify your investments, and build wealth at the same time, invest in real estate. Real estate is my favorite asset class to build wealth.
My favorite real estate investing platform is Fundrise. With over $2.5 billion in assets under management and over 210,000 investors, Fundrise is the leading, vertically integrated real estate platform today. Investors can invest in their diversified real estate funds with as little as $10.
Fundrise primarily focuses on single-family, multi-family, and build-to-rent properties in the Sunbelt. With lower valuations, higher yields, and strong demographic shifts, Fundrise investments are in the sweet spot of a positive long-term trend. Come check out what they have to offer.
Track Your Estate Carefully
If you want to leave your children and charities some of your wealth, then you need to carefully track your estate. Do so by signing up with Personal Capital, the web's #1 free financial tool.
Personal Capital enables you to track your net worth, analyze your investments, and help you plan for retirement. There is no better free financial product offering on the web today. I've used Personal Capital since 2012 and have seen my net worth grow tremendously since.
Related posts regarding leaving money to children:
Readers, what do you think is the right amount of money to give your children while you are alive and after you die?
For more nuanced personal finance content, join 100,000+ others and sign up for the free Financial Samurai newsletter. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009.