Likely you want any inheritance you leave to be a blessing rather than a curse, yes?
So, how do you get there from here?
Planning, careful planning.
Question: Have you ever noticed that "gifted" money just spends easier than one's own earned (after-tax) income?
Well, it gets even worse when the dollars are bigger and you are not around to give input regarding how to be a good steward.
Consequently, you really have to get your legal plans and your loved ones properly aligned through thoughtful legal planning early and often.
This was the topic of a recent article in Kiplinger’s Personal Finance titled “5 Strategies to Keep Your Heirs From Blowing Their Inheritance.”
Preparing the next generation has a lot to do with financial literacy, as well as with transferring key values that will sustain your family and your fortune.
Ongoing communication is essential.
In the end, a successful inheritance requires intentional parenting and money management whether your estate is huge or modest.
Obviously, there are a number of challenges attending any family windfall.
Here are just a few:
- Some inheritors can lack self-esteem, especially if they suspect that their success stems from their wealth instead of their efforts.
- Others inheritors may feel guilty and have trouble accepting unearned good fortune. In addition, their emotional development can be delayed when life does throw them some (inevitable) curveballs.
- We all know of cases where inheritors can get bored, turning to drugs and drink and other risky behaviors.
- Lastly, heirs can get frazzled with too many options or be paralyzed by a fear of losing their wealth.
Against this backdrop, some ultra-wealthy (think Warren Buffet and Sting) fully intend not to leave an inheritance to their children commensurate with their wealth.
Most parents, wealthy or of more modest means, do not want to disinherit their children.
But they do need a game plan to keep the family assets and the family intact.
The original article discusses ways to help prepare the next generation for whatever they will inherit.
For example:
Get over the money taboo.
Family finances are often an unpopular topic of discussion, particularly when the parents think that family wealth might spoil their children.
Young people without preparation who suddenly come into a trust fund when they turn 21 (or if both parents die in an accident) can go totally out off the rails.
Think lottery winners.
Heirs who are not ready frequently believe that their parents thought they were incapable of handling the information or could not be trusted with it.
Teaching point: Be up front about the wealth you have and your plans for it.
Embark on a mission.
Make sure your legacy is about more than money.
Consider crafting a mission statement with all family members writing down the values they want to emphasize in their lives. Potential values might include such things as education, philanthropy or self-sufficiency.
Once inked, this mission statement will help align the family with the long-term purpose of your wealth.
Raise money smart kids.
Surprise.
If you teach children about budgeting and saving when they are young, then they will be more financially mature when they are older.
Revolutionary, I know.
The original article recommends getting each of your young children a piggy bank with three slots or simply three separate piggy banks.
Either way, one separate slot (or separate piggy) is designated for each of the following practices: giving, saving and spending.
In fact, you can even ask grandparents who like to give cash to make their gifts in multiples of three.
When children are a bit older, allow them to budget an allowance to cover their own expenses.
What does that look like?
First, identify the child's monthly average spent on car insurance, cell phone, and other life “essentials.” Then, give them an allowance to pay those bills.
Without a hands-on budget, when will your children learn to prioritize or make prudent decisions regarding money?
Give Your Kids “Financial Training Wheels.”
Rather than hold onto all of your assets until you pass, consider seeding investment accounts when your children are in their late teens.
Once the account is created and funded, let them make investment decisions with you agreeing to "match" a percentage of the returns earned over a specific time period.
Along the way, each child can withdraw money from his or her account, but you cannot add to the principal. This may be an excellent tool to teach them about investing and spending.
In addition, this tool could vividly demonstrate the power of compound growth and the opportunity cost of robbing a nest egg.
Assemble a good team.
In addition to an experienced estate planning attorney, the article suggests you bring in mentors for the next generation. These mentors may include board directors and other successful businesspeople.
Hint: Your "de facto" advisory board can come in handy should the friends and classmates of your children start asking them up for contributions to investment schemes or business start-ups.
While your children may want to help their peers, it is nice to have a cadre of advisory board "no-men" to say no to hair-brained schemes and thereby protect both the inheritance and the relationships of your children.
It seems rather clear that you will have a better chance of preserving both your wealth and your family through a multi-generational effort that starts when your children enter the world instead of when you exit it.
An experienced estate planning attorney can help guide you throughout.
So, how do you find an "experienced" estate planning attorney?
Ask around AND do your own due diligence research.
Here are two sources clients report as essential to their vetting process (and the ones I also use before referring any matter to an attorney): Avvo.com and Lawyers.com.
Check the Avvo ratings, client ratings/testimonials and attorney endorsements on Avvo.com and the "peer ratings" by judges/attorneys and any client ratings/testimonials on Lawyers.com.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
Reference: Kiplinger’s Personal Finance (November 2015) “5 Strategies to Keep Your Heirs From Blowing Their Inheritance”
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