NEW YORK (MainStreet) —It’s a problem most people would love to have, but it’s a problem nonetheless: You and your spouse have amassed a degree of wealth that you hope to pass on to your children, but you’re hesitant even to broach the subject of money with them out of fear they could become spoiled by the very thought of an inheritance.
The key, according to experts, is opening an ongoing family dialogue on finance and investment that’s calibrated by how much you think your kids can absorb. It could start at a very young age, long before you introduce them to the idea that the family has money they may someday be entrusted to manage. And if done properly, you can help set up your offspring for future success without killing their motivation to work hard in the meantime.
The alternative can be financially devastating. According to the Heritage Institute, an Oregon-based organization that promotes multi-generational estate planning, 9 out of 10 inheritance arrangements ultimately collapse. And the problem isn’t new. “Riches,” wrote Adam Smith in The Wealth of Nations more than 200 years ago, “very seldom remain long in the same family.”
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In prior eras, family finances were often thought to be of no concern to anyone but the primary breadwinner. Thankfully, more couples now share this information between themselves. But many are still not comfortable including their children in any conversation about money — either out of an antiquated sense that it’s still “none of their business,” or a much more modern concern the kids will lose motivation once they find out there’s real money there.
It isn’t just parents who are reluctant to hold these conversations, though. And the taboo doesn’t end when the children are no longer kids. Merrill Lynch Private Banking and Investment Group’s recent Young High Net Worth Insights Survey found that adult children in wealthy families often avoid talking about money in family settings, because they worry they will disappoint their parents or fear that by asking questions they will seem overstepping or over eager. Consequently, of the 18- to 35-year-olds who participated — all with investable assets of $1 million or more — less than half said they ever discussed financial matters with their parents.
“But when they don’t ask and parents don’t discuss money, the absence of effective communication can jeopardize family wealth, harmony and even the transfer of certain values from one generation to the next,” said Merrill Lynch’s Phil Sieg upon release of the survey in early April.
Even worse, according to a March survey commissioned by online legal service Rocket Lawyer, 70% of Americans with children under 18 in the household have no will.
“There's a common misconception that a will is just about distributing financial assets,” says Rocket Lawyer founder and executive chairman Charley Moore. “But there are other crucial reasons to create an estate plan. When there's no will, families can be divided in their time of grief, with potential court battles over child custody, assets, and even memorial decisions.”
To help combat these potential problems, his company annually dubs April “Make A Will Month” and devotes it to raising awareness about estate planning — which includes offering anyone a chance to create a will for free on its website. After that, Moore adds, it’s a simple matter of keeping it up to date as your situation changes and keeping your beneficiaries informed of its existence (even if you keep the details to yourself and your spouse).
Irvin Schorsch, president and founder of Pennsylvania Capital Management in suburban Philadelphia, agrees that such problems are common. But he also believes they don’t have to be. “Foster a partnership spirit,” he says. “Get the kids engaged.”
Schorsch, who has been advising families on wealth management for 29 years, advocates for the need to cultivate communication between the generations. “At every new client meeting I ask, ‘Tell me about your kids. What kind of discussions have you had with them about money?’”
The Merrill Lynch survey confirms that many young people simply aren’t being brought into the discussion. One-third of the participants said they had less financial and investment know-how than their parents. And one-quarter said they really had little knowledge of these matters at all.
Schorsch suggests bringing kids along to a meeting with the family’s financial adviser as soon as the parents feel comfortable doing so. If children who visit him are too young for much in the way of specifics, he’ll give them a general overview of the type of investments the family holds — without dollar amounts — as well as a money and investing guide. Incrementally more detailed information can be shared as the children grow and become more knowledgeable, he adds, although complete details usually shouldn’t be provided before they reach adulthood.
To develop your kids’ financial understanding and investment savvy, says Schorsch, make sure they have skin in the game. You can do this at virtually every stage of their young lives, broadening the process as they grow up:
- Infants — Give them shares of stock instead of toys they’ll quickly outgrow, and encourage relatives and friends to do the same. Put these in a custody account, and as the kids get older begin introducing them to what they’re building and how to manage it.
- Grade school/middle school — Amp up the education and the appeal by switching to shares in companies that make the products they like. A fan of the ubiquitous blue boxes of macaroni and cheese might enjoy having a few shares of Kraft Foods. An Xbox or Playstation enthusiast might appreciate owning a small piece of Microsoft or Sony.
- High school — Take it to the next level when they’re earning a few dollars of their own. Help them open a ROTH IRA and for every dollar they contribute, match it in a separate fund set up for something they really want (like a car). The deal is, they have to take full responsibility and manage both accounts.
Not only will such a process help children learn their parents’ approach to money and investing, it will help parents understand their kids’ underlying goals and values. When it comes time to turn the keys to the family vault over to the next generation, the result can go a long way toward ensuring a successful transition.
“Not only have you been building capital and knowledge,” Schorsch says, “you’ve been building relationships.”
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