Passing on Family’s Nest Egg Comes with Serious Questions

WealthWhen it comes to figuring out how to pass along their estate and their values to their children, the affluent aren’t that much different from the rest of us.

They may have more money, but they also worry about passing down too much too soon and whether their children will grow up to be caring, productive individuals.

R. Hugh Magill, chief fiduciary officer at Northern Trust, a wealth management firm, said baby boomer parents are grappling with the problem and asking pointed questions:

“What meaning will our children derive from our wealth? How will wealth affect their sense of worth, their independence? Does it create dependence? How much wealth is too much, and what’s the right balance between private inheritance and philanthropy?”

Bill Carter, president of Carter Financial Management in Dallas, puts it another way: “What’s the magic amount of money where they will never live on the street” but not have so much money that you’ve taken away their incentive to work?

There are no simple answers. The key is to have family discussions about your money, your values and your aspirations for your children as soon as your child is old enough to appreciate your wisdom.

John and Gay Anderson of McKinney, Texas, achieved financial independence through years of hard work and diligent saving. John, 62, is a retired commercial real estate executive and Gay, 60, is a retired teacher.

“We’ve always put a lot of stock in savings and living within our means,” John said.

The Andersons have striven to teach their only daughter, 30-year-old Kelli, the value of money, starting when she was young.

“John always felt a special responsibility to train her,” Gay Anderson said. “She earned 25 cents for everything she ironed. It wasn’t just a blatant ‘Here, have some money’ kind of thing. We didn’t just want to hand it to her.”

The Andersons’ greatest concern is that Kelli “won’t be prepared to handle any of the estate we leave her,” John said.

“We really want to encourage her to develop a personal financial plan, a personal philosophy and become really familiar with the types of investments,” he said.

They’ve also told Kelli how they will handle her inheritance.

“We made it very clear to her we intend to leave her some of our (assets), but that I want it to be a supplement to her income and certainly not enough to solely live on,” John said.

Kelli, assistant director of the Southern Methodist University Abroad program, supports her parents’ approach.

“Knowing them, I’m sure they have planned to leave some to me to cover any bills they have, like any funeral expenses,” she said. “But I wouldn’t want to have them leave everything to me. They’re retired now, so I hope they get to enjoy some of the fruits of those years of putting me through college and their working hard all those years.”

Kelli’s father praises her for taking the lessons he’s taught her to heart.

“She is frugal and contributes toward the maximum to the 401(k) program,” John Anderson said. “She lives within her means without any subsidization from her parents.”

Kelli could be representative of how parents want their children to assume stewardship of the family money after the parents’ death.

“The main thing that our families are looking for is that their children are able to deal with the wealth and be comfortable with it and be responsible with it,” said Debbie Cox, managing director and wealth adviser at JPMorgan Private Bank in Dallas.

That requires some educating of the children. Dallas financial advisers Tom Murphy and Susan Sylvest of Murphy & Sylvest outlined a timeline to teach children about money:

?Ages 9-12: Introduce the concept of money. Explain the difference between cash, checks, debit and credit cards.

?Ages 17-19: Teach budgeting, debt repayment and the concept of wants vs. needs as children enter higher education outside the supervision of home.

Things become more complicated when families own a business.

“One of the primary concerns is continuity of the business,” said Magill of Northern Trust. “Almost all have devoted themselves to the prosperity of the business. They wonder who will step in and who will succeed them.”

If you own a business and you’re considering involving your children in the business, ages 28-30 may be a good time to start, Murphy and Sylvest said.

“After a child has enjoyed the experience of working for other companies, proving themselves to the company and themselves, it is time to bring them on board with your company in a support role,” they said.

“Most successful immersions occur when a child earns the right to grow with the family business.”

Be prepared for the fact your child may not be interested in following in your footsteps.

“Many times the passage of the business is not necessarily in the cards because the children don’t have an interest in it,” Cox said.

Whether children decide to join the family business or go off on their own, some parents will include having a job as a condition in an “incentive trust.”

This is a trust set up to encourage or discourage certain behaviors by using distributions of trust funds as a carrot. A typical incentive trust might encourage a beneficiary to complete a degree, enter a profession or abstain from harmful conduct such as substance abuse.

David McNeel, managing director at Bessemer Trust, a wealth management firm, advises parents to be supportive of their children finding a productive job if they’re not going to be in the family business and “supporting that as wholeheartedly as they would a child in the family business.”

No matter what your assets total, the key to a healthy transfer of them to your children is communication.

Failing to have frank discussions, McNeel said, “ignores the obvious and often leaves the children out at sea really wondering how their wealth will affect their personal priorities, their career choices, their education, their future or current spouses.”

Source: McClatchy-Tribune Information Services.