Illinois Estate Planning and Elder Law Blog
Many people are under the impression that families that accrue an above-average amount of wealth or assets will pass down these fortunes generation after generation. However, a Wealth-X report shows that 68% of the those whose net worth exceeds $30 million are self-made, 24% of those individuals have a combination of inherited and self-created fortunes, and just 8.5% solely inherited their wealth.
This comes as less of a surprise when one considers how difficult it is to transfer wealth from one generation to the next. Another study that spanned decades and followed 2,500 families found that 70% of family fortunes run out by just the second generation and 90% run out by the third generation.
Wealth can be difficult to retain and easy to mishandle, especially without preparation. Parents might spend time and money to properly organize their estate and later pass it on to their children, but those efforts may be in vain if their children are not prepared for that wealth. Future generations need to be equipped with the values, the knowledge, and the life skills needed to sustain inherited wealth so that they don’t find themselves overwhelmed and underprepared when they inherit the wealth you have accrued.
The Separation Is in the Preparation
Parents often have the best of intentions regarding why they are hesitant to prepare their children to inherit their wealth, such as worry that they are raising their kids to be spoiled or entitled. Parents might also feel uncomfortable talking about wills and trusts with their children, especially if their kids are too young to fully grasp these concepts. Parents might also be uncertain about how much control they should exert over the wealth they are passing on or how exactly they should divide it.
While these reasons for hesitation are understandable, it is in your family’s best interest to prepare your kids for the responsibilities of managing an inheritance. Here are steps you can take to prepare them for this:
1. Devise a proper estate plan.
Estate planning poses challenges, as facing your own mortality is uncomfortable and proper estate planning can require a considerable amount of time, effort, and expense. It is worth overcoming these obstacles for, though, as it allows you to minimize asset distribution costs and maximize the inheritance you leave for your heirs. It is important that you establish guardians for your children in case you pass away while they are minors. You might also want to plan to hand over assets iteratively instead of all at once so they won’t be overwhelmed by a large inheritance at a young age.
2. Give your children a sound financial education.
Education and being informed are vital to financial success, and one of the most important ways you can help your children prepare is to impress upon them the importance of saving, compounding interest, the benefits of asset diversification, and other topics such as these.
You can also help them learn by experience from a young age by giving them money to use (or lose) as they see fit. They should learn lessons from both their successes and failures that will help them take control of their own financial futures when they receive their inheritance.
3. Keep your children apprised of changes in net worth.
Openness and honesty are key when it comes to successful communication with your children regarding finances. You might not give your children every last detail about your finances, but you can give them an age-appropriate amount of information about your wealth and how it affects them.
You can also get your kids involved in small ways in your wealth management, such as letting them choose a charity to receive a donation from your family. This can help your kids develop a sense of responsibility and help them view the family’s money as a steward of it and not just a recipient.
4. Encourage your kids to build their own wealth.
Parents sometimes worry that knowing they will eventually inherit a fortune will stand in the way of kids pursuing their own goals and ambitions. One way to counter this fear is to put milestones in place over time to grant children a limited amount of control over their inheritance. One way to do this is through a trust that is set up to give children more access to wealth as they get older. It also gives them control of smaller sums when they are younger and can help them learn financial skills that will help them to manage larger amounts of wealth over time.
You may have spent your life building a fortune that allows you to take care of your loved ones now, but it’s important you also plan for when you are not around. Teaching your kids good financial habits early will help ensure they will have the resources and life skills to live comfortably in the future.
https://www.forbes.com/sites/adamstrauss/2020/07/01/4-ways-to-prepare-children-now-to-oversee-their-inheritance-later/?utm_source=Justia%20Blogging%20Ideas&utm_medium=email&utm_campaign=252a0d303b-blogging_ideas_estate-planning_20200701&utm_term=0_dba88020e6-252a0d303b-406015381#2cb743c9193c
https://www.wealthx.com/report/world-ultra-wealth-report-2019/
https://www.ft.com/content/eb4a390a-d926-11e9-9c26-419d783e10e8