One of the perennial issues high-net worth families worry about is how they can pass their wealth to the next generation without spoiling their kids or destroying their drive or ambition.
Throughout the years, there have been many studies that have attempted to understand exactly how wealth (particularly inherited wealth) shapes or changes personalities. One of the most interesting I’ve come across was recently conducted by Justin Wolfers and Betsey Stevenson, two economists from the University of Michigan.
Wolfers and Stevenson studied data from more than 155 countries and found that as average income increases, average happiness increases along with it. The relationship is linear: even after basic needs are met, the relationship doesn’t plateau.
Interestingly, the economists found that it was income – not net worth – that increased happiness. I believe this has important implications for estate planning, as the main reason we leave our estates to our children is ostensibly to support their quality of life – and by extension, their happiness. Knowing that inheritance is perhaps the most obvious example of boosting wealth without having to “earn it,” maybe it’s time we thought about how we can limit the potential of “unearned” money to destroy their motivation, ambition and drive. Here are three suggestions:
Teach heirs values
If you’re committed to ensuring inheritance doesn’t spoil your kids, then you should be committed to talking to your kids about your wealth: how you made it, why you made it, and what you hope is done with it once you pass it on.
Let the kids know what you’re leaving behind, and to whom. Have family meetings. Bring in an outside professional to facilitate the discussion if you have to. Talk about drive, ambition, and the importance of finding meaningful work.
Delay wealth transfer
Think carefully about when you want the kids to inherit. Delaying the asset transfer removes the temptation for young heirs to spend. Perhaps more importantly, it also gives them time to establish careers and earn their own success.
In our practice, we recommend people delay transfer of the bulk of their estates until heirs reach adulthood, usually age 35 or beyond. At that age, the kids have finished school and established their own careers. They’ve earned their own successes, and even if they receive a big lump sum, they’re unlikely to kick up their feet and live off mom and dad’s money for the rest of their lives.
Consider “outside the box” strategies
Some of the best ways I’ve seen to ensure inheritance doesn’t spoil the kids are ideas you might not see in the typical estate planning handbook.
One idea that works well with assets such as a family cottage is to make the inheritance communal. Instead of bequeathing the asset to one heir, put it in trust for all of them, with the stipulation that all family members use it and pay for its upkeep. After a given time, the trust sells the asset and distributes the proceeds. Or perhaps a family member agrees to buy out the others. Or everyone agrees to keep on holding it communally. Whatever happens, this is an effective way to shift the focus of your inheritance away from enhancing net worth and on to enhancing quality of life.
Another interesting idea is a “family bank” or general inheritance pool. Its purpose is to provide funds for specific needs, such as buying a first home or setting up a business. Family members apply to a professional trustee for funding, and have limits on how much they can receive. It’s a good way to ensure heirs put money to good use, rather than squandering it on meaningless luxuries.
One of the most intriguing strategies I’ve heard about is from Peter Jones, a U.K.-based serial entrepreneur and a Dragon’s Den participant. He’s set up a “match-funding” arrangement for his children. Once his kids graduate from university and secure full-time jobs, a family trust will match their earnings dollar-for-dollar for a given number of years.
Are such strategies necessary for every family? No. But they can work with very large inheritances, or in cases when children are still quite young. They prove that when it comes to ensuring kids aren’t spoiled, where there’s a “will,” there’s a way!
Thane Stenner is founder of Stenner Investment Partners within Richardson GMP Ltd., as well as Portfolio Manager and Director, Wealth Management. Thane is also Managing Director for TIGER 21 Canada. He is the bestselling author of ´True Wealth: an expert guide for high-net-worth individuals (and their advisors)’. (www.stennerinvestmentpartners.com) The opinions expressed in this article are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates. Richardson GMP Limited, Member Canadian Investor Protection Fund.