When affluent families walk through Tom McCullough’s office door, he knows they’re eventually going to ask him two things: How much money should they give their children, and when should they spill the beans about how rich they are?
“Of course, the answer to every serious question is, ‘it depends,’” says Mr. McCullough, chairman and chief executive officer of Northwood Family Office, a wealth management firm in Toronto. “It’s not age 25 and it’s not age 40. There’s no one answer.”
Granted, a lot of rich kids already know their families are loaded, even without being explicitly told by mom or dad. Perhaps the private jet or the second home in St. Bart’s tipped them off. A simple Google search can also reveal financial details.
Younger children, however, might not know. According to research by U.S. Trust, which surveyed more than 800 high-net-worth people in the United States a few years ago, nearly two-thirds of affluent parents had revealed little or nothing about their wealth to their children.
Money might be a taboo subject for many, but the rich have greater concerns than most, says Loren Francis, vice-president and principal at HighView Financial Group in Oakville, Ont. For starters, parents worry that telling their children will sap their motivation. Why work hard if they don’t have to?
“When you have significant wealth, then what’s driving you, right?” she says. “Parents want to be sure they’ve instilled a drive in their kids, before letting them know the actual number.”
Mr. McCullough has seen what happens when rich parents give their children too much information about their fortune, or hand them a huge nest egg too soon. Some adult children act like irresponsible teens even into their 50s, he says; others, who are unsure about what and when they might receive what Mr. McCullough calls a “money bomb,” put their lives on hold waiting for the day the trust fund or inheritance appears.
On the flip side, holding back information for too long can be detrimental. Children might end up finding out about the family fortune when the parent dies, and they are caught off guard with no time to prepare for the windfall.
Grown children might also have missed opportunities to live a more happy life. “Quite frankly, these people might have chosen a different route if they’d known some money was going to be coming to them,” says Mr. McCullough. They might have chosen more fulfilling but ultimately less lucrative careers, for instance.
Telling offspring too late could have another unintended consequence: stress. In an era when household debt levels in Canada are sky high, some adult children actually become worried about their outwardly wealthy parents’ lifestyles, says Stanley Tepner, first vice-president and investment advisor for CIBC Wood Gundy.
“Some of these kids are thinking, ‘I don’t know anything about my parents. This ‘ginormous’ house we live in? It could be a giant mortgage for all we know,’” Mr. Tepner says. “There are a lot of questions that can arise if the conversation doesn’t start somewhere.”
The trick is not to spill the beans too early, so you thwart children’s drive, but not so late that they are hearing about their millions at your funeral.
So when should you have “the talk”? Mr. McCullough says that he makes six suggestions when helping wealthy parents.
1. Allow children to develop normally
Show them what it’s like to live a normal life where everything isn’t handed to them. “People are better off when they have some purpose in life and some control over their own destiny,” Mr. McCullough says. “Too much money can eliminate those opportunities.”
2. Less is more
Give kids too much money and it can create entitlement and dependence. “I’ve seen enough damage done to children in wealthy families by giving them too much money. My experience tells me to err on the side of less versus more,” Mr. McCullough says.
3. Later is better
Some experts think people ages 35 to 40 who have already made some major financial decisions are adult enough to handle the money. Wait until they’ve built financial skills before giving them actual numbers, he recommends. “Giving significant amounts of money later in life allows time for people to build their own lives.”
4. Responsibilities and rights
If your children want the money, make sure strings are attached. No drugs, no bad behaviour in public – especially in a well-known family. In other words, there are rules. “As long as they are discussed and reasonable – not so much about controlling from the grave – responsibilities are part of good development.”
5. Magic moments
There are times in life when a windfall can go a much longer way than others. Give money at the right moment – before a wedding, after the birth of a child, or when taking on a first mortgage – and those monetary gifts are more appreciated. “We call it the milestone approach. You don’t really need the money at age 60, and you probably don’t need it at 20. There are key points in life when you do.”
6. Skin in the game
Inherited money does more good when it’s given to help pay for items the child was going to buy anyway. “We recommend people have matching gifts. You want a car? You put up half and we’ll put up half. It helps people make good decisions.”