AGrainewsreader recently called with a good problem, but a problem nonetheless. He and his wife were quite fortunate to have a farm, children and money. He and his wife were wondering if they could give their children a few hundred thousand dollars each without corrupting them. This is an interesting question that haunts many parents. We’ve all heard of the old adage where the third generation drinks and pisses away what the first two generations worked for.
My first comment was that I don’t think we can predict how anyone will react when they suddenly have a big fortune or even a small fortune come into their life. I’m sure there is lots of documented evidence that shows how people who won a lottery are broke in five years. There also are stories about rich people who got rich, went broke and got rich several times in their life. I suppose as long as they end up on the side they like best the story has a happy ending.
Then we’ve all heard the comments: “It’s easier to make the second million so that’s where I want to start.” And we’ve heard: “If I had your money I would…”
The real question this reader was asking was: the money has to go somewhere. What can I do to reduce the odds that the money I give my children will ruin their life?”
This is a legitimate question and over the years I have heard people say. “Why should I store up money? First, I’m not so sure money buys happiness, and second, I’m afraid too much money might spoil our children, it might corrupt them and it might make them lazy.”
Perhaps the first question is this: who is or will be responsible if you give your kids money and it ruins them? And who is responsible if you give your kids money and they use it wisely, perhaps use it as a base to build on, and so on?
In my 41-year career of working with people, I have seen parents scrimp and save on meagre family income and then the kids end up suing each other and their parents for money or property or both. I have also seen where the next generation used inherited money to humbly develop a business, farm, charitable work and so on.
I personally think that we as parents can influence our children’s behaviour up to a point, but once they become adults I think they are responsible for what they do and think and say.
While we hope we instil reasonable values about money and wealth into our kids’ heads I don’t think we can take credit or blame for what our children do with money we gave them. We might want to, but in the end I think the children have to be responsible for their words, actions and deeds.
What about the spouse? Sometimes it’s easy to blame the spouse for wanting the money and the image and lifestyle that an extra few hundred grand might bring. Sometimes the idea that Dad is sitting on a million bucks while a child or in-law has to drive a two-or 10-year-old car begets jealousy.
I don’t know if it’s fair to suggest that children who are brought up to respect hard work, learning and good money management will not get corrupted if they suddenly have a lot of money. I sort of always figured that I could influence our children up to a point and after that they had to be responsible for their own actions. I suspect that is the way a lot of parents feel.
BUILD IT UP
I think one of the first things for wealthy parents to do is to at least try to make sure their children are not under financial distress. Of course if they are under financial distress because of their own stupidity, well then parents might need to make some judgment calls.
During all my years of speaking and writing and learning, it always seemed that parents don’t need to treat each child equally but they should try to treat them equitably. Some years the kid who got the farm for a sweetheart deal might seem like the lucky one but other years not so. Of course we’ve all likely heard about the Christmas suppers where one kid or his or her spouse opened the can of worms by jealously opining that the kid who got the farm was very rich because he “had a new combine.”
So I think wealthy parents can rightly help children get the education and skills they need to make it in the big wide world.
I believe billionaire Warren Buffet said it more or less this way: I will give my children enough money to help them be comfortable but not so much that they don’t have to work.
This opens the door to giving children some money and leaving the rest to a charity or charities. There’s even a way to donate stocks and other assets that have capital gain to charities and not trigger income tax on the gains yet still get a receipt for the donation. Of course giving a bunch of money to charity can make the children either proud and happy or jealous and
resentful. But I would think some healthy split between charity and children should be OK.
Next I’m not sure I would pay off their loans but I likely would give kids a gift of money that could make a payment or two. Of course if one child had no payments then he or she would have extra money while the other child used the money to “catch up” on payments. That’s life.
If there are grandchildren, then I think there is a spot for some help. Grandparents can contribute to a Registered Education Savings Plan (RESP) for the little ones. And a grandparent with the right skills can even manage the money.
Matching contributions to a Tax-Free Savings Account (TFSA) or RRSP could be another way for parents to help children.
I personally don’t understand trusts well enough to write about them but I think there is a way parents can set up money in a managed fund that pays money out over time. The kids will get the money just not all at once. And I’ve often heard the saying, “It’s a lot better to give money away while you can see the smiles.”
WHAT ABOUT WILLS?
Can your will manage your money properly once it’s in your kids’ hands? I tried to get some opinions on that question from a couple of money managers I know. First, I spoke with Stan Clark, a money manager on my short list of people my family could call if something happened to my brain.
Stan had some general comments. He offered several thoughts but this stuff needs to be tailored to an individual’s estate so best you call him at 1-604-685-3434 or 1-800-661- 9442. One pointer was that it is very difficult for a parent to bequest money to children and then tell them what to do with
the money. However, if parents feel strongly about charity, for example they could meet with the children and send them an official letter asking them to do two things with the money they will inherit.
One is to use some commonsense amount to improve their life and generally that would be tax — free money. The other is to donate some money to a worthy cause. That would use tax — free dollars to create tax deductible donations to reduce income tax — on other earned income. I like that.
If you are concerned about an in-law getting hold of your money then you could set up two trusts through a qualified lawyer. In one trust put money the family can use so then it might become part of the assets if the couple split up. In the other trust put money that is intended to grow and donate out of that one to create a tax deduction.
If a child is not capable of looking after his or her affairs then one way is to ask a friend to be an executor and manager of the money and dole it out year by year or month by month. Some institutions will do that for you too.
Next, I spoke with Ed Thompson. He and his family run Money Concepts at Winnipeg, Man. Ed agreed that it was difficult to tell children what to do with money they get from your estate. And he said he has seen trusts broken, often at big expense. Ed’s business is on my short list of people my family could call. His number is 1-204-832-9148.
I didn’t talk to any institutional investors but I’m sure there are trust companies that would agree to manage your money and dole it out to children over time. Expect significant fees but those are the trade-offs.
Back in the old days when interest rates were a lot higher people often used annuities as a way to create cash flow for the future. Some of that cash flow would be taxable and some would be your money coming out which would be tax free. There are ways to blend that out so there is a more or less fixed amount of taxable interest per year over the life of the annuity.
These days when interest rates are pretty well below the rate of inflation and taxes, about the only reason to have an annuity is to protect the money from some person who might want to trick the old guy or gal into giving away their money. I suppose that is a decent reason under some conditions.
I hope that gets your mind going if you are concerned about how to give your money away without ruining your children. While many people would say this would be a great problem to have, often they are broke so they don’t have the problem. If you have worked hard, saved well, invested well, or perhaps inherited some money, then it seems proper to think ahead a bit and try to figure out how to transfer your wealth so some can be enjoyed, and some put to good use to help people less fortunate. There are lots of them around.
A reader ofStocksTalktold me one day that his biggest thrill is to help people in underdeveloped countries. Another fellow I know supports a school in a poor country. We support orphanages in Ukraine so girls who turn 16 aren’t kicked out on the street with no skills or money and no place to go. We donated money for several dozen goats for people and communities in Nairobi. These goats become game changers for the families. All of these donations can become part of a permanent improvement for the people on the receiving end. The folks who got beaten up by tsunamis, fires, floods and earthquakes also need help. These might be temporary types of help that help victims get over disasters.
I hope along the way that you help your children learn how to invest wisely. Often a good example on how to take money, and grow some, enjoy some and donate some is a good place to start. I find that people become much more disciplined and careful with money when they help to make it and our investment strategy has helped many smaller investors make good cash flow. If you don’t know how to teach investing then I encourage you to find someone who can help your children make good solid investments with the money they are going to inherit.
Andyismostlyretired.Hegardens,travels withhiswifeandmanageshisownportfolio. Andyalsopublishesanewsletterwherehe explainsalmostdaybydaywhathedoes withhisstocksandhowhesellscovered callstobringincash.Ifyouwanttoreadhis newsletterfreeforamonthgottoGoogle, typein StocksTalk.net clickonform,fillouta fewlinesandclicksend.
While we hope we instil reasonable values about money and wealth into our kids’ heads I don’t think we can take credit or blame for what our children do with money we gave them