When considering one’s legacy, deciding how much to leave your children, grandchildren and other beneficiaries is one of the most important questions families face particularly the wealthy. The range of possible answers is ‘everything’ to ‘nothing’.
Each family has a different view on how much of the family wealth will be dedicated to funding the activities, lifestyle and philanthropic strategies of current generations, and how much will be left as a legacy for future family members.
In some cases, this will be determined by the current generation’s decision about how much they will need themselves, and what balance, if any, will be left to future descendants. In other cases, a family steward will have a specific vision for what money could do for the family and/or the community for many years to come. This often creates a broader and more inclusive investment strategy for wealth distribution both within and outside the family.
Curtis L. Carlson, the magnate who owned the Radisson Hotel chain, was known to say “There’s nothing people like me worry about more – how the hell do we keep our money from destroying our kids”. Whilst Mr Carlson was worth more than $700 million, it’s a concern that applies to many families.
How much and at what age?
When helping clients clarify how much they wish to leave to their beneficiaries, the Warren Buffett quote often emerges: “I want to give my kids enough so that they could feel that they could do anything, but not so much that they could do nothing”. This often captures the spirit of balance when discussing the benefits and sometimes traps of wealth, particularly when it is inherited and not earned.
On the positive side, beneficiaries may enjoy a more financially comfortable life that enables them to pursue passions and interests that they may not otherwise have had the time for. Often these pursuits include noble philanthropic activities. On the negative side, without proper education and preparation, substantial inherited wealth can lead to entitlement, dependence, lack of motivation and poor self-esteem.
In some occasions, it can even be the forebear to eventual financial stress. The sons of Texas oil tycoon H. L. Hunt, whose fortune was once estimated at $8 billion, filed for bankruptcy protection in the USA in the 1980s.
It has become common for families to set age and possibly capability-related tests for access to their endowment. The most common age at which next-generation members begin to inherit is 25, with the possibility of some kind of phased approach up to age 35 or beyond. By then, most children will have finished their education, have taken a few steps toward their career goals, may have been restricted to live within a budget based on their own after-tax earnings, and learned to plan accordingly before beginning to take on the benefits – and related responsibilities – of greater wealth.
Linking your beneficiary’s income and capital payments to the achievement of key life milestones may help provide impetus and goals for the individual and can help motivate beneficiaries toward the energetic pursuit of achievements. For example, specific capital distributions from a testamentary trust could be documented in a Memorandum of Wishes for major life events during the crucial financial development years of 18 to 30, such as education funding, wedding capital, and a deposit for a first home.
Developing responsibility and self-esteem in beneficiaries
There are many benefits from allowing beneficiaries to ‘make their own way’, not the least of which is the satisfaction and self-esteem they will derive from their own successes. Inheriting too much, too early can get in the way of this sense of accomplishment. Phasing as well as conditionality can provide useful input to balanced wealth-life management.
Here are a few general principles when it comes to considering distribution policies:
- Allow people to develop naturally – people are better off when they have some purpose in life and some control over their own destiny. Too much money can eliminate these opportunities.
- Less can be more – giving beneficiaries too little won’t allow them to have a more comfortable lifestyle. Yet too much can create entitlement and dependence. Each family has to find the right balance that works for them, but in many cases less is more.
- Later is often better – giving significant amounts of money later in life allows time for people to start to build their own lives. Giving money too soon can stunt their individual development and life experience. In general, we strongly suggest to clients not to allow beneficiaries to access inherited wealth before age 25, unless it is for education, to purchase a house or basic income needs.
- Responsibilities as well as rights – there should be some requirements or responsibilities expected from people receiving money. A simple handout can feel like charity and devalue the recipient’s experience as an active and valued participant in the family. It actually has close parallels to how we assist clients with their philanthropic strategies – we want them to think of it as ‘social investing’ rather than ‘charity’. Everyone who financially supports philanthropic organisations or projects should expect to see a return on their investment and quantify the impact they are achieving. More and more families are looking to establish their own Foundations as a vehicle to introduce their children and grandchildren to the importance of governance, due diligence, education and giving back to the community. This greatly assists them in dealing with wealth and the responsibilities that come with it.
- Magic moments – there are certain key times in life when extra money will be greatly appreciated (e.g. education, purchasing a home, raising children). Matching the funds with those ‘magic’ financial moments can be a good way to help at critical times, yet still allow independence and self-reliance.
- Careful communication – thoughtful preparation and execution of a legacy plan that sets out the timing, context and messages being sent is critical.
We find that legacy and wealth transfer planning is a high priority for our clients, just behind managing their assets to enjoy the lifestyle they aspire to.
While each family has its own unique culture, financial resources, and philosophy, each one faces the challenge of helping their beneficiaries develop the independence and motivation that will allow them to succeed in life.
“We make a living by what we get; we make a life by what we give.” – Winston Churchill.
Stephen Lowry CFP, DFP, FAIM, is a representative of Alman Partners Pty Ltd, Australian Financial Services Licence No: 222107.
Note: This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person or entity. Accordingly, to the extent that this material may constitute general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. This is not an offer or recommendation to buy or sell securities or other financial products, nor a solicitation for deposits or other business, whether directly or indirectly.