People work their whole lives to build their estates, and passing this wealth on to the next generation is a top priority for many. The key to making this happen is teaching your children about money management to keep your legacy alive .
How to educate your children about wealth management
The best way to teach your children about money depends on your circumstances, their personalities, ages and your comfort level.
Consider sending older children to a money management class. For younger children, giving an allowance in exchange for doing household chores is a great way to teach the value of work and let them experience the power of savings for something they really want. You can also consider opening a savings account or a CD or buying bonds to teach kids about investing and compounding wealth.
How and when to gift
Gifting can be complicated, and too many parents take either an all or a nothing approach—either transferring large amounts of money all at once or making gifts that are too small to provide meaningful lessons about how to manage a large portfolio.
To combat this, make distributions large enough so that your kids have something significant to lose, but not so large that their entire inheritance is at risk. For example, if your child’s trust is worth $2 million, consider having the trust distribute $200,000 when your son or daughter reaches age 21. This size of distribution will provide a meaningful experiment in your child’s financial responsibility while safeguarding the bulk of the inheritance.
Some families choose other strategies, like encouraging financial success by making matching gifts equal to the amount of income your children earn each year.
Incentive trusts
These trusts reward children for doing things that they might not otherwise do. Incentive trusts are supposed to encourage positive behavior, but it isn’t a good idea to use them to control your children’s life choices. A trust that’s too restrictive may cause your children to rebel, or even sue.
Incentives are most valuable if they are flexible enough to allow a child to chart their own course. One example is the so-called “principle trust,” which gives the trustee discretion to make distributions based on certain guiding principles or values without limiting beneficiaries to narrowly defined goals. The problem with these is that they generally won’t teach your children critical money skills.
Planning for future generations
Ultimately, this all comes down to communication. Communicating with your children about the reasons behind your decisions will protect your legacy and increase the chances there will be money left to pass on to your grandchildren.
Please reach out to your trusted Smolin Professional with any questions or concerns.