It’s time to start thinking to whom I will leave my inheritance. If statistics are any indication, I’ve reached the halfway point of my life. Unless the genes of my grandfather on my mother’s side get passed to me, I’ve only got about another 40 years to go. It’s a sobering thought but not one that keeps me awake at night.
These two realities of life I know to be true:
1. Our death will occur at a fixed moment in time.
2. Nobody knows exactly when that moment will be.
So death displays aspects of certainty (we will die) and uncertainty (when?). I find that dualistic nature fascinating. Perhaps that’s why issues surrounding death and what will happen after we are gone remain difficult to discuss. We simply don’t like thinking about anything that relates to the end of us.
But we have to think about it for there is so much at stake. Mess up our death and it could impact those left behind for generations to come.
Where Does My Inheritance Go When I Die?
Along with the certainty of death comes this fact as it relates to our possessions:
“We can’t take them with us.”
This raises an interesting question – “If possessions can’t serve me in the afterlife, who gets my stuff when I die?”
On the surface, that seems like a complicated question. Digging deeper however reveals there are only three options for the dispersal of possessions. The wealth accumulated in life will transfer to either:
1. Our heirs. These would be any individuals chosen to receive a portion of the estate. By default this usually means family members but friends of the family are often named in wills as recipients of assets.
2. Charities. These would include churches, ministries or other non-profit organizations focused on a particular need. Gifts to charities are common at death because a) in life the person felt drawn to that charity’s mission and b) gifts to charities are deductible from a person’s estate, thus reducing the possible tax burden.
It may seem like an obvious statement but we can only decide who gets our inheritance before we die. If we wait and die without a will that spells out our desires, the court system will decide for us. That’s a huge risk because the court may end up deciding not to leave the estate to the ones you would desire most, which usually is family – specifically the children.
Do My Kids Automatically Deserve the Inheritance?
The practice of leaving an inheritance to one’s children has been occurring since ancient times. So it’s become ingrained into our modern thinking. There is an assumption that the next generation should automatically receive something when their adult parents pass away.
Children (especially grown children) begin to develop an expectation for what will be left to them as their parents age. In many cases the contents of the will have not been revealed to them, they just assume that because they are blood kin some portion of the estate will be left to them. “It’s expected…I deserve it because I’m family” so the thinking goes.
This thinking doesn’t only develop from the bottom up – kid to parent. It filters the other direction also – parent to kid.
Adult parents may feel the obligation to “reward” or “thank” their children for taking care of them in their old age. “What better way to thank them than naming them in my will.” The pressure to do this could be enhanced the more involved the children become in taking care of the aging parents.
In addition, adult parents may want their financial legacy to live on through their kids. They see the passing of wealth as setting the next generation or two up for financial success. In this way parents see what they are doing as a blessing, so the kids may be able to enjoy some pleasures possibly not afforded to them based on their current circumstances.
While those are nice sentiments, assuming wealth should be automatically passed to the next generation is dangerous. It neglects some fundamental issues to consider.
Kid Issues to Consider When Leaving an Inheritance
When deciding whether or not to leave an inheritance to their children, parents should consider the following issues:
1. The Child’s Age
In 100 percent of circumstances parents should attempt to leave assets for their children who have not reached adulthood. In the event of an untimely death, children will need money set aside for their care at least until they graduate from high school, perhaps even through college age. This money should be managed by their caretaker (or a trust) with explicit instructions on how to use it. To fail in this responsibility to provide for young children is negligent and irresponsible.
The age issue becomes cloudier as the children grow older. Parents become more detached from their children as they grow and the children become more financially independent. So they may not feel an obligation to leave their children money. In addition, adult children in their 60’s and 70’s may not have the same financial needs as a 16-year old. The money from an estate may be better served going in another direction.
2. The Child’s Need
Related to age is the concept of need. Do the children actually need the money? As I already mentioned, grown adult children who have been working and investing for 30-40 years may have accumulated vast amounts of wealth already. Someone in their 20s has not had that opportunity yet and could benefit more from receiving an inheritance.
Another issue to consider in regards to need relates to families with multiple children. The question to ask here is “Does one child need it more than another?” The neurosurgeon pulling in $600,000 per year would typically be in much less financial need than the school teacher making only $30,000 per year. That could get sticky of course with one child feeling they are being treated unfairly. Proper communication ahead of time would certainly be needed to avoid misunderstandings, jealousy and hurt feelings.
A parent might also want to ask these questions that relate to need:
1. What debt levels do my children have?
2. Are there medical issues that are causing a financial hardship for a child or grandchild?
3. Does my child have a large or small family to take care of?
Parents may feel uneasy dividing an inheritance unequally based on need – like they are expressing more affection for a specific child when this happens. It’s important to remember however that dividing an inheritance unequally doesn’t reflect on a parent’s love for their children. Love can always be divided equally among kids and shouldn’t be equated with possessions.
3. The Child’s Maturity
A child’s emotional and spiritual maturity should be huge considerations in the inheritance discussion for this reason: Will you be funding your child’s dysfunction by giving them an inheritance?
A child’s lack of maturity could manifest itself in multiple ways:
– relationship issues (i.e. divorces and other social issues with friends)
– financial malpractice (unwise use of debt, irrational spending, bankruptcy, etc.)
– drug or gambling problems (or other destructive addictions)
– work apathy and laziness
– lack of focus and life goals
If the child demonstrates consistency in these behaviors with no desire to change, giving them an inheritance would almost certainly exacerbate the problem.
In his book Splitting Heirs, Ron Blue suggests three questions to ask in respect to each child:
1. What is the best (or worst) thing that can happen if I transfer wealth to (fill in the blank)?
2. How serious is it?
3. How likely is it to occur?
That exercise should bring the clarity needed to either calm one’s nerves or raise alarms towards the recipients of the inheritance.
4. The Child’s Sibling Relationships
A final consideration in regards to children should be their relationship to other siblings.
Questions to ask here might include:
How tight is the family unit?
What are the children’s emotions towards one another?
Have there been instances of competitiveness, jealousies or sibling rivalry that have led to broken relationships?
Will the money enhance an already felt closeness or serve to drive siblings further apart?
Are there blended family relationships and issues to consider?
A Good Man Leaves An Inheritance
My wife and I have gone back and forth on this issue about leaving an inheritance for our children. Certainly we have always sought to provide a means for their care should we pass away before they reach adulthood. But what to do after that has been confusing.
At one point we were all about accumulating as much wealth as possible to pass equal amounts to each of our four children when we die. That seemed the most equitable solution for several reasons:
1. It divided the money evenly, removing the “showing favoritism” debate…
2. It would be our final blessing to each one and…
3. It would ensure our family’s financial legacy filtered into the next generations.
(All good reasons and ones I would not quibble with if that’s how a person felt.)
Our feelings about this were based on a verse in the Bible from Proverbs 13:22. It reads,
“A good man leaves an inheritance for his children’s children.”
Seems straightforward enough. Leave what you can for your children so that it even impacts the grand kids generation. The context of the verse implies that practice as a good thing.
I was reading this verse one day when this thought occurred to me, “Maybe Solomon is talking about more than money. In this verse, money is definitely in the inheritance equation but perhaps Solomon believes there are additional ways to influence children that could spill over from generation to generation.”
So I (we) got to thinking that perhaps simply building an inheritance to distribute all the money when we die isn’t the end-all of growing wealth. Maybe there is more value in teaching financial literacy, building family togetherness, imparting personal values and teaching spiritual lessons in the present. Those things would be more valuable of an inheritance than any amount of money that could be left upon our death.
What good would leaving money be if those left behind didn’t have the wisdom to manage and use it wisely?
We are now set on a dual path which involves building wealth to leave some for our kids, while at the same time using some of that wealth in the present to facilitate the aforementioned goals in the last paragraph.
Some ways this practically works out now would be for us to spend money on things like private school education, family vacations, summer camps and participation in sports and other extracurricular activities. Those all cost money that could be saved, invested in the stock market and ultimately grow to be an inheritance. However, we firmly believe that using some of the inheritance money now to impact their lives has far more value than if we left it until after we are gone.
So they won’t receive as much later as they could if we scrimped and saved all the way to our death. But hopefully they will receive something in the present that will impact them for the rest of their life. And the best part is my wife and I will get to see that impact while we are still alive.
What To Do Now?
Like many decisions regarding personal finance, only you can answer and solve this question. You know your family best – their depth of maturity, their needs and struggles. Factor all these considerations into the equation when deciding the inheritance issue.
The giving-wealth-to-the-kids decision is only one issue to resolve. There are many other factors and questions that go into setting up an inheritance. I’ll continue discussing those in my next post as I tackle “Inheritance Week” here at Luke1428.
Questions: Do you think children automatically deserve to receive something – no matter how small – as an inheritance? What’s your view on wealth accumulation – should you accumulate as much as possible to be given away at death? Have you seen an instance where an inheritance wrecked a child’s life?
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