April 2010
Wealth Transfers to Children:
The Four Definite Dont's When Divvying Up the Loot
By Gary W. Buffone, Ph.D.
In my years of speaking with affluent client’s who are struggling with the questions of wealth transfer to their children, I offer them what I refer to as the four definite don’ts when divvying up the loot.
Pitfall #1: Giving Too Soon
The first and most common error made by parents is lousy timing or bestowing wealth before the child is psychologically ready. Adult children need to have time to find themselves and carve out their niche in life before they’re ready to take on the additional responsibility of wealth. I believe the timing of large gifts and inheritances is a critical factor, even more important than how much money is given.
I suggest parents wait until their children are in their mid-thirties before transferring control of major assets. If they’re going to have a family they’ve already started or are at least laying the foundation for one. If they’re going to work productively, they’ve gotten through school and are well on their way to a stable, and hopefully meaningful career. If they plan to make a contribution, the adult child has been involved in activities that are already paying early psychic or economic dividends to themselves, their family, and their community.
Or not. The fact is, if they haven’t by this age, they probably never will. In which case, I suggest parents plan accordingly. Clearly, if they have a child whose just never made it, become responsible, or established a stable life structure by their thirties, at least they can make decisions based on that fact. As a rule of thumb, if you’re really uneasy about how your kids will handle such a transfer, adopt a “wait and see” approach.
Pitfall #2: Waiting Too Late
A second frequent blunder parent’s make is procrastinating or putting off making these difficult decisions until the worst possible time. People put off what they don’t want to face, namely, their mortality. They’re big believers that they’ll get to it tomorrow. Unfortunately, sometimes tomorrow never comes, the parents die or are incapacitated and the surviving family members are left frantically scrambling around trying to settle the estate.
After a sudden loss, grief can hit like a sucker punch. Family members are dazed, confused, and frequently in the throes of an emotional tornado that can lead anyone to mismanage an inheritance. Grief stricken and depressed, they need time to heal from their loss, not push through all the financial maze of settling an estate.
This is the worst time to try to sort out these already delicate and often complex questions. I advise clients to be proactive, but if they find themselves caught in the throes of grief and depression after such a loss, to take the time to recover fully before tackling these complicated issues.
Pitfall #3: Holding Too Tightly
A third common error affluent parents make is to give money or gifts tied to a host of unreasonable conditions. They just can’t quite let go of the economic reins. We’ve all heard the stories of the tyrannical father who tied the kids inheritance to their marrying a certain spouse, or choosing a particular career, or their keeping the grandchildren within a certain geographic area. Some parents bind their children with silver strings long after their deaths, virtually extending their control from the grave.
Some would say gifts are gifts and no conditions should apply. That may be true in some circumstances but I do think there are certain circumstances, such as when a child is engaged in self-destructive behavior, that recommend setting certain conditions on inheritances, as is done in estate planning instruments and trusts. Talk with your financial consultants about any concerns in this area.
Pitfall #4: Giving Too Much
Even as parents decide the when of giving, they’re still haunted by the decision of how much. Many affluent parents, whether they’ve come into money suddenly or earned and saved it over a lifetime, agonize over this question. How can we enrich our children’s lives but not ruin them by giving too much?
So what is the magic number, the amount that enriches your child without robbing them of their self-esteem? Unfortunately, there is no such number. But the key factors in the “how much” decision is based on the child’s true need and character. The greater the true need, as with a handicapped child, or the stronger the child’s character, as with the child who has established themselves independently, the larger the gift. The smaller the true need and weaker the character, the greater chance any gift will cause problems.
I believe that in most cases less is better. If you’re focused on helping your kids lead happy, fulfilling lives, very little of that has to do with their having huge sums of money. As long as their, and even their children’s most basic needs or met – food, shelter, medical, love and limits – whether they’re happy or fulfilled or not is really up to them. It’s not something you or anybody can bequeath in a will or by writing a fat check. Remember, happiness is entirely an inside job.
Adapted from Choking on the Silver Spoon: Keeping Your Kids Healthy, Wealthy and Wise in a Land of Plenty by Dr, Gary Buffone. Dr. Buffone can be reached at www.thefamiywealthresource@gmail.com or www.thefamilywealthresource.com.