Children who grow up in wealthy homes have the same needs as all children, but raising them presents its own particular challenges and opportunities for parents. Whether you have earned or inherited enough wealth to make your children wealthy in turn, there are many questions to consider and many expert resources that you can consult.
Wealthy parents worry about raising their children to be autonomous and responsible adults. If they give their children access to too much money too soon, will they choose not to work or work as hard as the otherwise would? What is the right age to begin transferring money, and how do you tell your children that they will receive an inheritance?
How much money should children be given, even as adult children? Of all the questions that wealthy parents ask, this is the most challenging. Self-made billionaire Warren Buffett was quoted as advising, "You should give your children enough that they can do anything, but not so much that they will do nothing." Studies and interviews have found that when wealthy parents prepare their children for inheritance and teach them how to handle money, they will be better prepared when they are given a limited amount of money in early adulthood Your investment advisor can help you create an investment structure to achieve this end.
Having said that, some young people seem either unable or unwilling to learn how to manage money, despite the best preparation. Others accept their fiscal responsibility readily and with great success. Ideally, parents of all income brackets would like to see their children either attend a university and learn a profession that they can later use in the workforce, or at least work and earn much of what they are spending by the time they reach their mid-twenties.
In general, parents should think about giving their children as much control over their money as they are able to manage responsibly. All children need to gain experience making financial decisions, even if some of those turn out to be financial mistakes. It's better to make small mistakes and learn from those choices, than to never lose any money and never learn where potential pitfalls may lie in the road ahead. Not learning these lessons may have devastating results for adults down the road.
How do parents and grandparents typically transfer their wealth to the younger generation?
1. When most of a family's money is tied up in a business, wealth is disbursed to family members through share ownership in the business, with a controlling number of shares held by the founder or current CEO.
2. Sometimes parents transfer the entire inheritance outright, although this is a rare incident. Parents need to educate their children about managing money and the responsibilities that come with it, especially when the children are under the age of 21.
3. The most common manner of transferring significant wealth to the next generation is by creating trusts. If the wealth is more that one generation old, then the child may be the beneficiary of several trusts from grandparents and great-grandparents, with inheritances kicking in at various times in their lives.
4. In some families, the money is doled out by the parents as they see fit, even though the money may actually legally already belong to the child, unbeknownst to her. This type of parental control relationship sometimes lasts a lifetime, with adult children always waiting for the next installment of their allowance.
There are many different types of trusts with features that are beneficial for different family and personal situations, and for all levels of family wealth. Make sure that you consult with your tax, legal and investment advisors to structure the best plan for your family. Invest the time now to lay the groundwork to give future generations the financial independence to look after themselves.
If you or someone you know have recently been left an inheritance, and has questions about their financial situation & how to prioritize the decisions that lie ahead, please contact me as a resource to help you.
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