20 February 2015

Passing wealth to the next generation...What do parents do?

What do parents do?

Parents adopt different approaches, and sometimes it may make sense to adopt a different approach for each child, depending on the character of each, while yet ensuring that each child is treated fairly.

Make a gesture

A common approach is to pay for children’s education and then give them a significant amount of money – “the sort of thing that let my older boy make a down payment on the house”, says Gordon Moore, co-founder of Intel – but perhaps little else.

Thomas J. Stanley and William D. Danko, in their book The Millionaire Next Door – the surprising secrets of America’s wealthy, seem to agree with this approach and suggest that a good form of ‘economic outpatient care’ is that which has:

“…a strong positive influence on the productivity of the recipients. This includes subsidising your children’s education and, more important, earmarking gifts so they can start or enhance a business”.

Give it all away

Other parents, however, are happy to give their children all their money. This is because they know they can’t control the future and they hope that they have brought their children up with the right values to be able to deal with wealth. We frequently hear comments like:

“I’d rather give my money to my kids than do anything else with it…I can’t control the future, and I’m not going to worry a whole bunch”.

“My instinct would be to just pass the money on and hope that in doing so you also pass on your values – how to use it, the life to lead, the standards to have”.

A good incentive

Some believe that, far from the receipt of money being a negative influence on children, it can act as an incentive. One inheritor comments in Fortune magazine:

“I feel I’ve got to make my mark equal or better than my father. If the children have been brought up right, they end up attempting to outdo the parents”.

And continuing the same theme, others believe that parents not passing on a reasonable proportion of their wealth can cause problems too (again in Fortune Magazine):

“If you’re the child and you see your father with all this dough and you get some but not much, I just can’t help thinking resentment will enter in….My dad is one of the most honest, principled, good guys I know and I basically agree with him. But it’s sort of strange when you know most parents want to buy things for their kids and all you need is a small sum of money — to fix up the kitchen, not to go to the beach for six months. He won’t give it to us on principle. All my life my father has been teaching us. Well, I feel I’ve learned the lesson. At a certain point you can stop.”

In my next blog we look at what happens to passing on the family wealth when there is a family business involved – not without its challenges!

Richard is a Chartered financial planner, Certified financial planner, Fellow of the Personal Finance Society, Fellow of the Institute of Financial Planning, and Affiliate of the Society of Trust and Estate Planning. He works with clients in Scotland and in London and has particular expertise in helping individuals and families pass wealth down the generations. View Richard’s profile here.

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