30 Jan 2015 How Much Inheritance Will You Leave?

When we bring up the question of inheritance for the first time with new planning clients, their answers usually range from ‘nothing, we want to use it up’ to ‘they get whatever’s left.’ Most share without reservation that it is a subject on which they have spent little or no time considering. Understandably so, the subject of death is morbid, and talking about an amount at the end of our lives seems silly given all the unknowables ahead of us.

Regardless of the size of our ultimate estates, our answers to the question of what we wish to leave say more about us than we realize. They provide keen insight into our views about family, money, trust, legacy, and financial planning. Over the next 30 years, baby boomers will leave some $30 trillion to their heirs. It represents the largest transfer of wealth in US history according to consulting firm Accenture. How those entrusted with the wealth manage it will define in part our future culture, government, and prosperity.

First and foremost, the question of inheritance is a very personal one. Good planning requires careful thought and education and a change in mindset. Inheritance is more than mere assets and a death event. Clearly these two aspects describe it on the surface, but there is so much more to inheritance: In the larger sense, it is what we can impart long before we are gone through our wealth and time.

The idea of inheritance as a process begins with teaching children financial literacy and good money-management or stewardship today. It involves educating them in the values and purposes of money and how it expresses the family’s vision and mission. It ultimately empowers them to live into the family’s vision long after we are gone and through generations to come.

Family is the bedrock of our culture and of civilization. Inheritances passed from one generation to the next either weaves families more closely together or it tears them apart, ruining the lives of many it touches. As the size of an estate grows, so does it’s power to destroy the next generation if they are not properly prepared to manage and continue to invest it well and on purpose.

In his book David and Goliath, Malcom Gladwell quotes James Grubman, a psychologist who uses the expression “immigrants to wealth” to describe first generation millionaires who face the same kinds of challenges relating to their children as immigrants to any new country face.

Their childhood and young adult experience was totally different as they grew up with all kinds of financial and physical challenges to which their wealthy children have no way of relating. As they struggle to teach their children their values, they must do so without the luxury of answering their children’s request for, say a pony, with ‘no, we can’t afford it.’ Grubman says they must learn instead  to say, “No we won’t.” This response, according to Grubman, requires a conversation. “Yes we can buy that for you, but we choose not to, it is not consistent with our values.” The statement of course also requires that we have a set of values and that we can articulate it well, making a plausible argument  to our children amidst all the trappings of wealth.

We know all too well the stories of huge estates ruining ill-prepared heirs. Gladwell writes that most countries have some way of expressing the curse of ruin by inheritance. In America, it’s ‘shirtsleeves to shirtsleeves in three generations.’ In Italy ‘from stars to stables,’ and in Spain it’s he who doesn’t have it does it, and he who has it, misuses it.’ All too often, the self-made millionaire is simply too busy making and enjoying the millions to educate his or her children about the struggles he or she faced along the way and the values that were learned in the process. It’s so easy to see how they were too busy building their fortune to consider the bigger picture of what it meant for the vision and mission of their family and the wealth it will ‘enjoy’ going forward.

Bill and Melinda Gates will give a reported $10 million for each of their three children says Roxanne Roberts of the Washington Post, “pocket change compared with their $76 billion.” Buffett’s three kids each have a $2 billion foundation funded by Dear Old Dad. The rest of his money? Going to charity, just like Gates and several other billionaires who have pledged their vast fortunes to improving the world.” Having read much about Gates and Buffett, it is apparent their values guide their lives, both in family and publicly.

The rest of us don’t deal with as many zeroes as the Gates and Buffetts, but the challenges and opportunities we face regarding inheritance are just as important. Buffett famously said he wants to leave his children “enough money so that they would feel they could do anything, but not so much that they could do nothing.” We have to think that if he’s saying this in public, he has shared it with his children in more specific and directed ways.

Each of our children is different as are our our family’s circumstances, vision and mission. Some of you reading this Brief have young children and are currently concerned about their well-being should you die prematurely. Others of us who have more years behind than ahead might rest comfortably on our carefully crafted plans, wills, and trusts thinking we have done all we can or should regarding inheritance. But have we, truly?

The discussion of inheritance is too vital and important in the life of a family to be held exclusively in the offices of financial advisors, estate and tax attorneys.

All too often, survivors only learn of mom and dad’s intentions after they are gone, leaving the survivors to figure out, or worse, fight out, the practical applications and ramifications for their lives.

Parents who openly discuss inheritance in the context of their family’s mission, vision, and values not only better prepare their children for the responsibilities that lie ahead, they learn in the process the unique capabilities and requirements of each of their children in regard to money. Robert Pagliarini of Forbes suggests giving each of your children a gift of say $14,000 (the maximum gift-tax-free amount) to see how they handle it. Do they invest it, pay off debt, or spend it? How they handle $14,000 may tell you a lot about how they will handle $1 million or $25 or $50 million.

Pagliarini also suggests an alternative to an outright cash gift; use the $14,000 annual gift instead to pay down children’s college loans or mortgages. Mortgages and college loans are substantially higher than in our day as boomers. Reducing these debts earlier can have substantial positive financial impact for our children later in life.

Family discussions that explain our intentions this side of the grave can make profound differences in the hearts and lives of our children. For instance; equal distribution of an estate seems equitable on the surface, but what if one or more of your children could use more than an equal share through no fault of their own. They may have chosen a worthy but under-paid profession such as ministry or teaching or they may have had illness or disabilities set them back financially. Without open discussions, repeated regularly, a larger distribution to one or more could be taken as greater love or favoritism.

Another thorny area arises with assets that will survive the parents and pass onto the next generation. Take for instance, a family vacation home. Passing the asset to all surviving children could be a recipe for family strife when planning and discussion could easily head it off. Homes require supervision, maintenance, and improvements. Decisions become more difficult with three or four children with their spouses weighing in. Additionally, what happens when one of more of the children does not have the resources to keep up? In this case a trust set up to cover the home’s upkeep is a good idea. Open family discussions for parents to share intentions and plans go a long way toward heading off family tension and division.

Whether as parents you choose to invest heavily in your children during their lifetimes, leaving a smaller estate, choose to build as large an estate as you possibly can, or fall somewhere in between; having a vision, a plan, and sharing often are vital components of living and leaving an inheritance – a legacy of who you are, one day were, and what you want your family to continue to be. It is the epitome of investing well.