Billionaire Warren Buffett was famously quoted as saying that when it came to leaving our children money, the sweet spot is “just enough so that they would feel that they could do anything, but not so much that they would feel like doing nothing.” Bill Gates said more or less the same thing. He has left less than a tenth of 1% to his kids (albeit that is $30 million!).
Twenty years ago, my clients routinely left their entire net worth to their children. There wasn’t a question or decision to be made; it was automatic. Now clients at all levels of wealth are re-evaluating their options and asking me for guidance on how much to leave to their heirs.
How to Have an Impact
Motivation seems to be a major concern. We parents want to be helpful but wonder if we will discourage our children’s innate creativity and industriousness if their lives are too cushy. On the one hand, perhaps a great education and good values are enough to leave our children. On the other hand, can we help reduce their stress and allow them to pursue their true passions and (less lucrative) careers by giving them a safety net?
Whose money is it anyway? What is our money for? Is it for our kids? Or is it for placing our personal stamp on the world? If the latter, there might be better ways to create a legacy than to give it all to your children, who will give it to your grandchildren and so on. (Do you know the values or even the names of your great-great-grandparents? Your heirs will likely know very little about you, too.) It’s worth considering that the best way to make an impact on the things you care about may be gifts to charities, companies or people outside your family.
Alternatives to “Leave Everything to …”
Here are some options for leaving money to your children/nephews/nieces that might make more sense than the simple “leave everything to …” model:
- “I’m going to gift to my kids what I can this year and in future years for the rest of my life. I’ll then leave whatever I have left to support my charitable interests at my death.” This approach allows you to watch your children and grandchildren enjoy the money during your lifetime, and it also allows you to see if they can responsibly handle a smaller amount of money before getting larger amounts. My clients have also given gifts of family vacations, college tuition, home down payments or other specific items instead of gifting money. (From my experience, paying for family vacations has been the most rewarding gift for both givers and receivers.)
- “Instead of leaving money to my children, I’ll give them something tangible, like a house.” This has potential complexity in terms of how the house will get maintained and shared, but it does leave something of meaning to the children. I’ve seen this work positively and negatively.
- “Instead of leaving money, I’m going to give them the right to control a charitable foundation that I’m funding.” This is what the Rockefellers did so well. It is an option that has created better educated and more responsible kids who don’t just think about their own needs. Of course, as with any of these options, you can do this with just a part of your money. I recommend that you create a shared charitable fund with your children today. Have everyone research a favorite charity, make a presentation to the whole family, and decide together how much to give to each charity.
- “I’m going to leave them money in a trust but only for certain things, such as education or buying a new home.” This gets tricky and might produce the feeling in your kids that you don’t trust them to make smart spending decisions. It’s essential to talk with your children prior to your death if you’re going to do something restrictive like this.
- “I’m going to leave money to a charitable remainder trust.” This allows you to leave your children an income for the rest of their life, with charities getting the balance when your children pass. Many parents like the idea of their kids getting an annual income without having access to principal. The disadvantage is that their children lack the flexibility to take a larger amount of money to start a business, for example.
- “I’m going to leave money to 529 plans for my children or grandchildren.” This means the money will likely be used for education. It has the advantage of not needing an attorney, nor does it charge fees. And it also has tax advantages. But you’re limited in how much you can leave with this option.
- While it sounds fair to leave money equally to all your children or grandchildren, an unequal distribution might better fit the situation. But if you are going to do anything unequal, it’s critical that you talk with your children prior to your death; otherwise, it will likely be construed that you didn’t love them equally. (Trust me on this one; I’ve seen it!) Likewise, if a chunk of your estate will be left to charity, give your family advance notice so that they aren’t surprised or upset. While such conversations may sound uncomfortable or scary, they have the potential of being an intimate and rewarding family bonding time.
Whatever you do, the most important thing is to think it through, make the decisions that match your values and share your intentions with your family. How you approach this might very well influence your children a lot more than how much you actually leave them.
