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3 Things to Consider Before Leaving an Inheritance to your Children

Monday, 7 October 2019

We understand that thinking about having to leave an inheritance can be a sensitive subject for some people. We wanted to help make you feel a bit more prepared by giving you some things to consider before jumping into a big commitment such as this one. It is easy to know whether you want to leave the biggest assets you have to your children, or grandchildren. It only makes sense to leave it in the hands of the people you love, and want to help them in their future, whether that be helping them pay off student loans, or providing a down payment on a house. In truth, receiving an inheritance can help with life’s most stressful challenges, but do you know for sure that your fortune would be put to good use? If this is a concern of yours when it comes to leaving an inheritance, keep reading! We might be able to offer some advice on how to make a more insightful decision when leaving an inherience to your children.

How well educated are your children on finances?

If you're considering leaving an intheritance to your children, first, teach your children about money! From an early age, it is important to teach children about the value of money. Start by providing them with an allowance to teach them about saving and how to budget. When they are young, you can start by getting them different piggy banks. One for spending and one for saving. This will show them the separation of their finances, and how to know exactly how much they can spend freely without spending every penny they have. When they reach their adolescent years, teach them to budget themselves properly to be able to cover their expenses. Whether they need to pay for car insurance or a cell phone bill, being able to prioritize and make decisions about how to spend their money is important. 

Another idea is to give your children a financial test. Gift your children money without any restrictions or rules and watch what happens. Put to the test how responsible they are when it comes to “free” money. Do they save it? Use it to pay off outstanding debts? Do they ask for help? Or do they blow it as soon as it touches their hands? If they save it, this could be a good opportunity to teach them about investment decisions. It gives them the chance to learn firsthand about compound growth, and the benefits of investing versus spending. These types of financial skills can be the root to successful inheritance, and a reflection of proper money management and parenting.

Does inheritance breed laziness?

It is a great assumption that if young adults come into a large fortune from previous generations, it can stop them from working towards financial stability of their own. Perhaps providing your child with too much money could take away similar ambition you had to accumulate that wealth in the first place. Some people believe that leaving a large sum of money can cause financial dependence and end up raising children with no drive, creativity or passion. Warren Buffett once said that when it came to leaving his children money, his goal was to give “enough money so that they would feel they could do anything, but not so much that they could do nothing.”

Traditionally, first-generation wealth creators are coming from a middle-class background or even poverty. This allows them to spark a drive inside them to work hard, persevere and become self-disciplined in order to reach financial success. Because of this, when they reach this success and have children, those children have a completely different experience of the world than they had growing up. This difference in experiences can make their children believe they do not have to work as hard to achieve the same financial success. On the other hand, if they use this as an opportunity to create something of themselves, inheritors may begin to lack self-esteem and feel that their success is only a result of their wealth and not their efforts. They could even find it difficult to accept this type of fortune that they didn’t earn themselves. Although this can be true for some, it is valuable to teach your children about proper work and structure in order to use the money to assist them in creating something meaningful, instead of not creating anything.

Are your children prepared for this kind of responsibility?

Preparing the beneficiaries is a crucial element of successful inheritances. Usually, the focus of these kinds of transactions is on the ones giving the wealth, however, we think the focus should be shifted on to the ones receiving the wealth. It is important to consider the level of responsibility your beneficiaries have and how well they will handle receiving an inheritance. According to some financial experts, most people spend their inheritance within one year of receiving it. With this in mind, it may be a good idea to consider hiring a money manager or professional management of the wealth if you think your children need it. This way, they could have restrictions on the money, and it may force them to be more responsible. You could leave the responsibility in the hands of someone with more maturity and experience to make spending decisions, which could be beneficial for young adults and minors. If you’re not looking to assign someone to this role, putting the wealth in a trust will add more boundaries as well, and could be set up according to your own rules for distribution.

Our best advice would be to talk to your children or grandchildren before leaving them your fortune. This can help improve the chances of them using it in a responsible way and could potentially help your wealth last over multiple generations. You could also consider leaving gifts without leaving “free money”. You could do this by paying for a mortgage or student loan debts, this way you are reducing a huge financial burden. It is understandable to want the best for your children and feel obligated to provide them with as much as possible to help them.  When it comes time to leave an inheritance, you should consider leaving the most you can to your heirs, and less in government fees. Luckily, we have ways to do that, and can advise you properly based on your situation. Let us know how we can help you through this process, we are always here to answer any questions you may have.Contact us today for a no obligation consultation.