How much money should parents leave behind? Do rich kids deserve a windfall?
‘œIt is not only fine feathers that make fine birds.’ ‘“ Aesop
Back in January, there was a captivating profile in Fortune Magazine about Melinda Gates, power philanthropist and wife of Bill. The article noted their plan to give away 95% of their wealth in their lifetimes and when asked how much they will leave their children, Melinda indicated they will follow Warren Buffett’s philosophy: ‘œA very rich person should leave his kids enough to do anything, but not enough to do nothing.’
Fortune has written about this at least once before. Back in 1986 to be precise. I’m surprised they even had this one online instead of in the library basement where articles of old can only be found on microfiche. But here it is in living link color.
Buffett does not believe that it is wise to bequeath great wealth and plans to give most of his money to his charitable foundation. Having put his two sons and a daughter through college, the Omaha investor contents himself with giving them several thousand dollars each at Christmas. Beyond that, says daughter Susan, 33, ‘œIf I write my dad a check for $20, he cashes it.’
Buffett is not cutting his children out of his fortune because they are wastrels or wantons or refuse to go into the family business — the traditional reasons rich parents withhold money. Says he: ‘œMy kids are going to carve out their own place in this world, and they know I’m for them whatever they want to do.’ But he believes that setting up his heirs with ‘œa lifetime supply of food stamps just because they came out of the right womb’ can be ‘œharmful’ for them and is ‘œan antisocial act.’
So what’s the right amount to leave them? He went on to say that for a college graduate, Buffett reckons ”a few hundred thousand dollars’ sounds about right.
Others use what’s called an incentive trust. This blogger at the Wall Street Journal explains:
Inheritances that have strings attached are known as incentive trusts. They might stipulate that a kid can’t have access to his $10 million until he graduates from college or gets a job. Or they might say that the heir gets cut off if he or she is caught with drugs or abuses alcohol. Some are values-based, saying that an heir has to live up to the broader values of the patriarch in order to get the money.
But should money become a shaper of character? He continues:
To my mind, however, incentive trusts are something of an oxymoron: You leave your kid a fortune, but attach conditions designed to mitigate the impacts of that fortune. It’s a bit like giving someone a lifetime supply of Haggen Dazs, but saying that they can only eat it if they agree to diet and lose weight. And if the conditions are values-based, then the parents are using money to impose their views and principles on their kids ‘” another effective way of robbing them of their own identity.
So here’s my advice: If you really want to mitigate the effects of large fortunes on your kids, don’t leave them a large fortune. Let them find their own careers and success, rather than using money to dictate from the grave.
Character aside, Dayana Yochim at The Motley Fool argues that a dollar spends the same unless it’s inherited and gives these tips to ready yourself for a windfall:
1. Do not put your life on hold, waiting for the windfall.
2. Chill out, but don’t freeze in your tracks.
3. Treat it like you would any other money.
4. Don’t invest like your parents.
5. Carefully consider your options.
So what do you think? Are you relying on an inheritance as part of your financial plan? Do you expect a windfall from your mom and dad? Do you receive trust payments now and if so, what stipulations are attached to them? Would you choose to pass on great wealth to your kids? What is the difference between money gained and money earned? We’d love to hear your thoughts below.
I received a very small trust fund from my grandmother which I finally got at age 40. From my mother I got a little life insurance which I used to pay off the cars. From my father I expect nothing or close to nothing. Ahhh, the joy of not having to deal with thinking about what I would do with a fortune…
Seriously though, an inheritance would be nice but I can’t imagine doing any thing out of character. If anything, I’d put it in my kids’s 529s.
Both my partner’s parents and mine have been fortunate in their investments and retirement planning.
While there is almost no chance either of us will inherit enough money to stop working, it seems probable that we’ll inherit something on the order of our mortgage payoff or children’s college education.
And while we joke with my partner’s parents that their condo is our retirement plan, such windfalls are not at all part of our financial planning process. Catastrophic illness might wipe them out; they might live past our children’s college needs. And unlike the occasional lottery ticket purchase and subsequent fantasizing, I don’t think we’ve ever even spent that money in our imaginations.
If we are lucky enough to get a financial cushion like that, I think we both hope to be able to pass that same favor along to our children.
My parents are fairly wealthy and it’s likely that they will pass some of it along to my siblings and I. I really have no desire to think or fantasize about it, because in order for me to get it, my parents would have to die.
So que sera, sera.
I hope one day to inherit my family’s ranch. However, as part of that, I will have to pay my sister for her half of it, and that will be a *lot*. I also hope to not inherit it for lots of many years. Which will give me time to save up for it.
My ‘rents, who are very fiscally astute, say they’re going to live their retirement with the goal of leaving us nothing. Which I heartily approve of, my folks have worked hard.
My mom talks with me occasionally about what she plans to leave me, and more importantly to her, what she doesn’t. Because she has no grandchildren she intends to give a lot of her money either to charitable causes or to other people of my generation who do have children. I just keep repeating “Mom, its your money.”
I didn’t earn it, and I have no rights to it. I’ve always made my retirement plans based on the idea that I am inheriting nothing. It could always work out that way. If G-d forbid my mom wound up spending years in a nursing home or a worse her entire estate could be spent before I inherited it(*).
(*)In fact my parents arranged for a bypass trust so that this need not happen. If you have well-off parents, and they care at all about what happens to their money after they die, good estate planning is a must.
On the show 30 Rock, Tracy Morgan has a great line when meeting with his financial planner. He says “I hope it’s all cool, because i don’t want to have my kids HAVE to go to college”. This is the modern spin on the Buffett quote. Too much money means your kids don’t have to go to college… just enough means they have to do something…like go to college and try to make something of their lives. …Although college isn’t for everyone. 🙂
I’m not a fan of people trying to control things from beyond the grave, so I don’t like the incentive trust thing.
As it happens, I’m unlikely to be the beneficiary of anything. I expect that my mum will spend it all on herself (in a good way) and that my dad will have enough left to pay the debts, but not much more. My grandparents might leave money, but it will probably go to my brother the eldest grandson who is likely to waste it. All fine with me.
I prefer money to go to charity, so if I had grown up children, I maybe wouldn’t leave them anything more than a token sum.
Debra and Liza: If money came my way after my parents passed on, then I’d do the same… pay off the mortgage or use it for the college fund. I wouldn’t go crazy with the windfall.
Sarah: Valid point… an unexpected gain like an inheritance obviously has a downside to it.
Mary Sue: If you want the family ranch and your sister doesn’t, you should speak with your parents now about adding a buy-out clause. This could include a stipulation for how to determine a fair value for the property and perhaps a payment plan. It will make things easier when the day comes.
Larry: I’ve always lived that way as well… like I will not get anything. Then if for some reason it happens, it’s truly a bonus not a necessity.
Andy: I have a major crush on that Tina Fey. Got any financial nuggets from her character?
Plonkee: Why does your brother get the “most-favored” notation? Just because he’s the first born? That’s an antiquated and lame patriarchal approach in my opinion.
I do not intend to leave anything for my children. That may sound really harsh, but we are parenting later in our lives than most moms and it has been enough of a financial challenge. I put 10% off the top into retirement planning (5% matched at work) and the rest is for living on now. Social Security is not likely to be available for me (born in 1966) either- so I really want to maximize the amount I can save for me.
I do not expect to get any money from my parents either. My father has made some really BAD financial choices over the years (he wanted to believe that declaring himself a business means no taxes whatsoever- that weird meme that went around in the greedy 80’s– yes you do have to pay taxes. He got snagged to the tune of tens of thousands of dollars and was thisclose to federal prison). He has gotten to where he is doing alright but won’t retire anytime. He has to work.
My mom invested smartly and is living well on her investing and my step-pop’s retirement. They have a large home, but I anticipate over the next few years, they will need to sell it- it is way beyond their ability to upkeep and my partner and I can’t keep up the pace of our home and theirs forever. I would hope that they enjoy and use their money without worrying- they earned it, not me or my sister.
DivaJean: I don’t think this approach sounds harsh. Children should not expect anything from their parents in the form of an inheritance. And if there happens to be one, then great… but kids shouldn’t rely on this as part of their financial plan.
When the rich parents pass away…the money should be put in a dynasty trust. However much wage earning income that the child has made and makes should be matched by that of the trust. Its good incentive to get the grand children working as well because when the child dies…the grandchildren then become the beneficiarys.