It’s unusual to see “frequently asked question.” More typical is the word “questions.” But in my experience, there is one question I hear with a frequency that is so much higher than any other – the plural is not needed.
When do I tell my kids what they’re going to inherit?
My answer is always the same. “When they’re ready to be a good steward of wealth.” Inevitably, this is followed up with a barrage of questions, concerns etc. But I stick with that answer. Teach your children to be a good wealth owner, and it doesn’t matter what age you tell them what they’re going to inherit. The question they should be asking as a follow up is, “what makes them a good steward of wealth.” Let’s explore that a bit further.
There are a few elements that make for good wealth stewardship: competency around personal finance, a basic understanding of investing, a deeper knowledge of any areas the family focuses on be it business or investing, understanding of family history and legacy, connection with family values which may or may not be tied to philanthropy, and relationships with key advisors. At this point, a conversation around their personal trust and estate plan is paramount.
Competency Around Personal Finance:
I start with this, because it is something that can be taught at a young age. In wealthy families, kids often have an allowance at a young age. This allowance doesn’t have to simply be “fun” money that is given to kids on a weekly or monthly basis. Allowance can be used to teach basic budgeting skills. As children get older, it is wise to build on these budgeting skills, using real life such as the gift of a first car, to teach about bill paying and having a safety net in case of emergency. Though the tendency may be to simply pay for our children, after all that’s often why we make money in the first place, the smarter option is to teach them to understand the value of both spending, and earning, a dollar. This way, when they are privy to their inheritance, they will more often see it as a finite amount that needs to be budgeted to sustain their lives.
Basic Understanding of Investing:
I do not know of a single HNW family that doesn’t invest in some form or another. And in fact, most invest in many different ways, ensuring a diverse portfolio that reflects the long term family goals. Though most, if not all, of the family money may be managed by one or more money manager, it is wise to teach your children to understand the reports they’re going to be seeing quarterly for the rest of their lives. I highly recommend a basic understanding of different types of securities, their risk and rewards, as well as how to invest in them, before disclosing dollar amounts.
Deep Understanding of the main Investment(s) in the Portfolio:
This is where things begin to vary from family to family. Some families may still run an active business. Some may invest in alternative markets, such as private equity, and some may be very active angel investors. No matter the family focus, a large amount of time should be spent in this area, because presumably, the next generation will eventually take over the portfolio, and will need to understand these areas.
Family History and Legacy:
This is an oft neglected area that is so important. I often hear from next gens that they feel disconnected to their wealth because they aren’t the wealth creator. This is often indicative that they don’t understand the blood, sweat, and tears that went into building family wealth. I know of no wealth creators who didn’t go through a lot to get where they are. And in subsequent generations, maintaining and growing that wealth is often equally as challenging. Make sure to teach your kids about the wealth creators, and ties that bind with prior generations.
All families have a set of values that underline decision making. Hopefully they are written somewhere so that they can be shared early and often. Keep in mind that these may differ from your child’s personal values. That’s completely fine, if they understand that as they make decision that effect the family, the family value system should be considered.
Relationships with Advisors:
One of the biggest mistakes I see is waiting to introduce the next generation to key advisors until they’re “needed.” The challenge here is that the children then default to the advisors, or fire them, because they’re not comfortable with the relationships. Not to mention, in the unfortunate event of tragedy, having knowledge of key advisors and their roles can be extremely helpful.
Though you can certainly begin to teach your children about trusts and estates, and the structure of their own personal trusts before you complete the items listed above, I would highly recommend waiting to discuss details and dollar amounts.
A few other notes:
1. It’s never to early to start. Behavior is mimicked. If your kids see you being a good wealth owner, they have a higher likelihood of being good inheritors.
2. You have the control. Which means, if you think they are not learning what they need to learn, or are afraid of what will happen when they inherit their wealth – put parameters on their trusts.
3. And finally, don’t think you need to do it all yourself. Hire consultants and educators to help.