How Can Parents Prepare Children for a Future Inheritance?
As originally published in Worth
When it comes to raising children, significant family wealth can be a double-edged sword. On one hand, wealth introduces many positive things: the best education, the chance to expose children to travel and culture, greater flexibility in child care and freedom from worry about health care and other commonplace costs. However, wealth also introduces some significant worries about children being overwhelmed by the responsibility of managing their inheritance; concern that the wealth will isolate children or make it difficult to form strong personal relationships; and even worries that children will grow up feeling entitled or less motivated to pursue meaningful work.
The good news is that a fair amount of research has been done on these issues, particularly over the past 10 to 15 years and more specialized resources are now available to parents and grandparents with significant means. As this area of expertise has developed, there are some common threads in the advice as to what parents can do to be proactive and minimize the negative consequences of wealth.
Get the Conversation Started
Experts generally agree that it is never too early or too late to begin financial conversations with kids. For young children, these can be very simple discussions about what money is for and might include playing “store,” taking the roles of cashier and customer. For school-age children, parents can help kids differentiate between needs and wants, and provide an allowance to give kids firsthand experience managing small amounts of money. Parents should also keep their eyes open for “teachable moments,” where they can demonstrate how the family makes decisions about spending, saving and giving.
For older children, it is important to talk in greater detail about the factors that go into financial decisions, and prepare them for how the family’s wealth may impact their lives. Will a major expense like college be paid for? Will their allowance be replaced by a trust distribution, and when? Like most things in life, people do a better job managing something when they are prepared for it, and an inheritance is no exception. These should not be conversations about dollar numbers but rather discussions on why money will be available, how it can impact a child’s life and the choices he or she will face in the future. To be effective, these must be two-way conversations where children are encouraged to express their own goals and ask questions, without judgment.
Give the Gift of Financial Literacy
Parenting experts also agree that children need a basic level of financial and investment knowledge to be confident and informed decision makers. Financial literacy alleviates the psychological burdens of wealth because educated children are not overwhelmed by their financial responsibilities and are less vulnerable to personal or professional contacts with harmful intentions.
Parents can recruit their advisors to assist in a child’s education. The family attorney can help kids understand the intentions of a trust, how it works and the responsibilities of the trustee and beneficiaries. The family investment consultant can help teens understand what they own and help them gain an understanding of the financial services landscape so they are educated consumers of investment products and services. Not only do these conversations and sessions instill knowledge, they help the child form his or her own relationship with these family advisors and provide other adults beyond a parent to whom they can turn with questions and concerns.
From Wealth to Values
All of these actions—talking with kids about financial decisions, preparing them for what is ahead and ensuring they have the skills to sit in the driver’s seat—give meaning to money and choices about money. They provide children with the foundation they need for the future, alleviating some of the potential downsides that wealth introduces.
The material shown is for informational purposes only and should not be construed as accounting, legal, or tax advice. Altair Advisers LLC is a registered investment adviser with the Securities and Exchange Commission; registration does not imply a certain level of skill or training. While efforts are made to ensure information contained herein is accurate, Altair Advisers cannot guarantee the accuracy of all such information presented.