by Michael Lodge
Wealth and kids. Gosh is there anything else to say about the transfer of wealth of you to your children. Parents worry about this every single day as they are planning the wealth transfer now or in the future. I found a great article by Bryce Sanders, who is President of Perceptive Business Solutions Inc. His article is titled, “Transferring Wealth to Irresponsible Children. Read below.
In an episode of The Blacklist, Raymond Reddington asks Earl King VI, patriarch of a 200-year crime family, “Sixty-five percent of inherited wealth is gone by the second generation, 90 percent by the third. How do you do it?” Baby boomers who worked hard to accumulate substantial assets may not want to leave them to spendthrift children. What advice can you give them?
What’s the Real Issue?
“Money doesn’t buy happiness, but it keeps the kids in touch.” Boomer parents, now in their 50s to 70s, fear losing control. If they have children accustomed to visiting the “Bank of Mom and Dad” even in their 30s and 40s, they worry their kids see their eventual inheritance as the start of their luxurious retirement lifestyle. Even worse, they see those inherited assets in the center of a messy divorce settlement.
What’s the Wrong Solution?
They must resist the urge to control their money from the grave. They might choose to set up a highly restrictive trust, not allowing their heirs to touch a penny until they are 40 years old.
Another ill-conceived strategy is to establish a trust with a miserly trustee who will say “no” to any requests. This will foster resentment for generations and keep the lawyers employed. The controversy surrounding the Barnes Foundation is a good example.
This problem doesn’t involve tax return preparation, so why should you get involved? Because it’s an important issue for your client. They probably don’t know where to turn for advice. You are a fiduciary, not a person selling a product.
If the client ignores the problem, their worst fears may come true. It’s been said that 70 percent of lottery winners burn through the money in just a few years.
Your motivation for helping is noble. You are addressing one of their “elephant in the room” issues.
What’s the Right Solution?
Hopefully everyone is healthy and expected to live a long time. This puts time for implementing a solution on the boomer parents’ side.
The best answer may come from an unexpected direction. Your client may be entirely wrong about their children, especially if many years have passed and their kids live in another state. They may have the picture of an irresponsible teenager burned in their mind. The reality may be their child is a mature adult with a spouse and children, making regular mortgage payments in Seattle.
They need to see more of their children, for starters. Perhaps draw up a (confidential) pros and cons list based on current data. Their children may have become responsible adults.
But what if they need more convincing? Give them an opportunity to shine. Seriously wealthy baby boomers may have already established their own charitable foundation. Put the children in charge of researching and choosing worthy causes, and presenting their parents with recommendations on where that year’s disbursements should be directed. Parents need to heed this advice or the effort is wasted.
If the parents haven’t started a charitable foundation, a donor-advised fund, set up through a mutual fund company, may be a good option, and $25,000 should get you started. The amounts awarded may be small, but the exercise can teach the children about responsibility and philanthropy.
Suppose their children don’t pass the test or opt out? Guess the parents were right after all. Then certain trust vehicles or guardianships might be the best solution. You can recommend several legal professionals, suggesting they interview them before choosing.
Letting go of their wealth can be terrifying to baby boomer parents with children. You can help them reason through the situation.