Shape Your Child's Fiscal Future Today

Physician's Money Digest, May 15 2004, Volume 11, Issue 9

When your children inherityour assets, will they beready to bear the burden?While it's true that a bigbank account makes meeting the monthlybills an effortless chore, money can exacerbateunderlying relationship issues.

For many first-generation affluent parents,an important objective is teachingtheir children how to manage their newlyattained wealth and status wisely.Frequently, however, these parents areperplexed about where and how to startthe financial education process.

For those with children still at home, itcan be difficult. These parents desire toteach the benefits of frugality, but want toenjoy the more comfortable lifestyle theycan now afford. Arguably, no area offinancial management is more emotionallycharged than wealth transfer planning.Following are a few key areas parentsshould consider when crafting theirbrood's long-term plan.

Responsible Parenting

As many psychologists will tell you,frustration erupts when there is a disconnectbetween expectation and reality.Perhaps nowhere is the potential for frustrationgreater than when dealing withwealth transfer. If there are assets, it's upto the wealth holder to plan for their eventualdistribution (eg, how much, when,and in what financial vehicles) and psychologicallyprepare their progeny to successfullymanage the distribution.

Affluent parents understandablystruggle with the issue of how much networth their heirs will be able to successfullyhandle. To the extent that privilegediscourages a child from finding their ownpurpose and reason for being in life, it canalso be an overwhelming burden and adisservice that lasts a lifetime. And just asthey are born with unique personalitytraits, children are also born with differentfinancial attitudes.

Some children are hard-wired withexpensive tastes, while others will wearthe same pair of jeans for years out ofreluctance to part with funds. In the end,whether you leave them $50,000 or $50million, if left to their own devices, thespenders will burn through cash fasterthan a late-1990s internet IPO, while thesavers will steward every penny. Parentsowe it to their children to teach them to becompetent stewards of wealth.

Children of Paradise

In her book (JPTarcher; 1990), Lee Hausner repeatedlystresses the importance of giving childrenthe ability to develop wide-ranging competency.For children growing up in affluenthouseholds, this can be especially difficult. As Dr. Hausner points out, "Manywealthy parents lead lives that place themin strong supervisor roles. Eliminating, orsignificantly diminishing, this take-chargeorientation when parenting is not easy.But parents who assume the responsibilityfor making all the important decisionswithout input from their children areencouraging dependency rather than helpingtheir children develop competency."

Affluence Awareness

Affluent parents need to be aware ofthe emotional messages sent by providingfunds to their children. For example, ifparents step in with financial aid everytime their child's credit card is overextendedor cell phone bill is too big, themessages "struggle is bad," "you're incapableof helping yourself," and "you'renot responsible enough to get yourself outof jams" come through loud and clear.Come to their aide too often, and an entitlementmentality may be firmly establishedin the minds of those children.

Not all expenditures are bad. Payingfor post-secondary education is a legitimateway to help children prepare for anindependent and productive career. Butthink carefully about the message beingsent before pulling out the checkbook.

An expenditure many parents chooseto help with is housing. Affluent parents,however, often don't consider the child'songoing ability to support the chosenhomestead or lifestyle the neighborhooddemands. It's entirely understandable forparents to want their children to own nicehomes in well-respected neighborhoods.But what happens to a child's self-esteemwhen part of the mortgage paymentcomes from mom and dad?

The bottomline:

In addition, you shouldn't help yourchildren out solely for tax purposesbecause you can or think you should.Remember, your heirs can inherit yourassets, but not your wisdom. Personal wisdom can only beattained by overcoming obstacles in lifeand struggling toward personal goals.

Postponed Generosity

According to many financial advisors,a significant amount of money providedbefore age 25 can seriously impede achild's search for a meaningful livelihood.Some advisors recommend waiting untilchildren are at least age 40 before grantingthem access to significant assets. Howsoon is too soon? Part of the answer lies inwhat lessons the children are taught whilethey're growing up about the role moneyplays in life. They need to learn theresponsibilities that come with affluence,not just revel in the privileges.

Disbursement Issues

For those parents who have multiplechildren, fair treatment may or may notequate to equal dollars per child. Someaffluent couples are intent that equal dollaramounts flow to each child, and manyprofessionals argue that this approachensures future family harmony. Somegrandparents, however, want each grandchildto be treated equally.

In this case, a child with a larger broodwill receive more of their parent's wealththan their siblings who have fewer or nochildren. Which approach works bestdepends on the family's unique dynamics.The more communication the senior generationprovides about their intentions,the less resentment and tension there islikely to be among siblings.

Though the issues surrounding wealthtransfer planning are thorny and emotionallycharged, it's important to keep inmind that they aren't insurmountable.With thoughtful attention and carefulplanning, affluent parents have an incredibleopportunity to pass on a lasting legacy—both financial and emotional—to thegenerations in their wake.

Carol Clark is a principal withLowry Hill, a comprehensive, privatewealth management firm withassets in excess of $5 billion andoffices in Minneapolis, Naples, andScottsdale. She welcomes questionsor comments at cclark@lowryhill.com. For moreinformation, visit www.lowryhill.com.