How Much Should The Kids Get
For most parents, deciding how much to provide for the futures of their children is a question that answers itself: the money runs out before their needs do.
If you’re lucky, you manage to pay for all the gadgets your child requires in these times, maybe a good used car when they’re old enough to drive, and hopefully a college education just as your purse or wallet runs dry. With some planning you might leave them a modest inheritance amounting to a house and a few mutual funds they can divide among themselves.
But for the wealthy, the notion of financial support and an inheritance can be far more complex. Simply put, high-net worth parents have a lot more than their children will ever “need” so they have to figure out how much money will do their children good. When it comes to loving our children, there is such a thing as too much money.
One of the world’s most famous billionaires, Bill Gates, has told interviewers his three children will inherit only a miniscule portion of his wealth, which today is about $50 billion. That amount of money, Gates said, would not be good for them.
You don’t have to be Bill Gates, however, to face the same dilemma of deciding how much and when to give your money to your children. For those with a lot of it, money can be both a blessing and a curse, a great gift or a heavy burden.
Here in Seattle, we have plenty of people less wealthy than Bill Gates but with enough millions that managing their wealth is complicated. Many are newly rich, beneficiaries of the city’s entrepreneurial success. Their wealth was probably unexpected. Many might not have any history of wealth in their families. Their parents might have been teachers or truck drivers. They can’t ask their parents for advice.
What do you do with your money if you are suddenly a millionaire many times over and have two kids? More urgently, what do you do about it this year?
At the end of 2012 the tax incentives informally referred to as the Bush era tax cuts will expire unless Congress acts to extend them as it did two years ago. Among the tax breaks that will end is a federal gift tax exemption of $5 million. Essentially that means a parent can bequeath up to $5 million tax free to his or her heirs. Two parents can gift $10 million to their child. If the tax cuts are allowed to expire, the exemption will revert to only $1 million.
So if a parent has always intended to give say, $2 million to his child later in life, he suddenly has a huge incentive to do it now even if his child is too young to benefit from the gift or even understand its ramifications.
Many clients who come to us for advice on this matter aren’t exactly sure how to even start thinking about it. They might understand the laws and the tax implications, but are at a loss when it comes to the emotional calculations. Usually, they come through the door feeling a mix of fear and hope, hope that giving a lot of money to their children will enhance their lives, fear that it could instead ruin it.
The fear stems from uncertainty. How much should I give, and how much do I keep? Will I take away my child’s incentive to succeed? Will he or she spend all the money? How can I instill common sense and a work ethic in my children if I just give them a huge sum of money? And how will it impact other members of the family? All those fears are compounded if the parent and child have a troubled relationship. If you think giving your kid a lot of money will solve the problems the two of you already have, you’re probably wrong.
To get parents to feel less fear, we encourage them to think about their hopes for the gift. What do they want it to accomplish? What does the ideal outcome look like? What do they want the legacy of their family to be? How good might it feel to see their money put to good use by their children, during their lifetimes instead of after?
We remind them the money could help their kids do something special in their life they could not otherwise do and create a tremendous amount of hope. If you do not have a clear sense of your own values, your family’s values, what your legacy should be, you will probably always focus on the fear.
These discussions can get into heavy stuff like your family’s money history, the way you communicate, maybe some bad personal experiences involving money. We’re not trying to be their psychologist, but we are trying to figure out what is keeping them stuck and trying to uncover the issues that are preventing them from making a decision with confidence.
Hopefully we are just accelerating what they already intuitively know.
As a positive approach to follow, you could do a lot worse than Mr. Gates. Worth $50 billion, he has not said exactly how much he intends to give his kids although reports have indicated the amount is $10 million, or 2/10,000ths of his net worth. He has said he intends to pay for their educations, but expects them to pick a career and go to work.
Gates’ attitude about inheritance reflects a broader view Baby Boomers tend to have about leaving their money to their children. A recent study by wealth managers found that a third of millionaire boomers would rather leave their money to charity than to their children. Only half of them felt it was important to leave money to their kids.
When he retired as the chairman of Microsoft, Gates famously said, “with great wealth comes great responsibility,” a reference to the work done by the charitable foundation that is now his full-time job. Transferring wealth is also a responsibility that needs to be taken seriously.
Few have come up with a better rule of thumb than Gates’ good friend Warren Buffett. Give your kids enough to do anything they want, he said, but not so much that they can do nothing.