Some parents fear leaving their children too much money. They talk about their friend’s child, who ended up doing little with their lives and abusing drugs and alcohol. Or they have an image of “trust fund babies” who sleep all day and party all night.
The good news is that the vast majority of children with inherited wealth do lead productive lives and would not fall into any of the above descriptions. Their parents set expectations, provided guidance and encouragement, and set limits when the children were growing up. No surprise their children turned out just fine.
Parents also fear leaving their children a significant part of their wealth because it could ruin their drive to live a productive life, fearing they simply might not feel the need to work. Or that the children will feel that any financial success they achieve will not be meaningful compared to their inheritance. So, they choose to leave a relatively small inheritance, enough to help but not eliminate the need to work. But parents often greatly underestimate the amount their children may need simply as a safety net, let alone to enhance their lives. Further, parents may not be aware there are certain controls they can put on the money they leave to their children that can assuage fears about misuse.
As parents grow older, learn about these controls, and start to realize economic conditions are different, many end up changing their minds about how much money they want to leave their grown children. Coming to this conclusion earlier rather than later can have its benefits.
Here’s how to re-think leaving money to your children.
Determine your goals
If a parent’s concern is that they will harm their child by leaving them too much money, they need to determine what dollar amount will cause that harm. The answer depends on what they want their children to achieve with the money. Then consider the what-ifs. For example, assume a parent wants to leave their child $500,000.
- What if the adult child has a health crisis or they have a baby with a disability, incurring significant costs to the adult child and/or preventing them from being able to work?
- What if the market sinks and the $500,000 becomes $250,000?
- What if despite working hard, they or their employer are put out of business by a competitor, regulations or shifts in consumer taste?
While $500,000 may seem like a lot, if you take into consideration all the possibilities, it can be dissipated quickly on non-frivolous expenses. On the other end of the spectrum, some parents ask where the limit is. When is the line crossed from “enough” to “…….