“Are your kids inheriting too much too soon?”, as featured in StarBiz, The Star, on 26th October 2019
As parents, we want to give our kids better lives and opportunities than we did in our time. But is there such a thing as giving your children too much?
It’s a norm these days for loving and well to do parents to offer to help purchase their child’s first car. Some parents may even go as far as to bequeath a piece of property for their children – something which many young professionals on their current pay cheque are struggling to own! This article is not to argue about why parents shouldn’t pass on their “assets” to their offsprings, but rather how it can be done more effectively so as not to cause conflict, discontent and disagreement if the assets are to be distributed too soon and/ or too much.
Paris Hilton was notorious for her extravagant spending, drug abuse, and partying days, resulting in drunk-driving charges and the need for rehab. Meanwhile Tori Spelling, daughter of successful film and TV producer Aaron Spelling, made a habit out of her infamously extravagant spending, prompting her late father to modify her inheritance to a mere USD 800,000 out of a USD 500 million legacy. To this day, Spelling struggles with debts, while relying on her mother to help clear her rent and other bills.
Closer to home, a client of mine was lucky enough to amass a good mix of properties throughout the years. He now wishes to pass on these assets to his 2 surviving children. However to his dismay and dissapointment, both children ended up arguing about who is getting which property. And the cause of the upset? Each of the properties is different in value.
Thus, it warrants us parents asking ourselves, if our well meaning actions could lead to unexpected or unwelcome results?
What’s the point of giving our accumulated estate all away after all that hard work, some may ask? In reality, there are several ways that a large inheritance can be damaging to our kids:
Let’s take the decision of buying a car. After working a couple of years, your kid is likely earning around RM3,500. While the recommended monthly installment of a car should be around 10% of your gross monthly income, if your child knows he will one day have an inheritance to fall back on, he may make an unwise decision of purchasing a luxurious car that takes up almost half his salary (not to mention, a depreciating asset). This decision may seem harmless at first as you’re able to support him. But add decisions like these up and combine it with an ever-growing standard of living, your kid will end up in the red sooner than you think.
When your children inherit this money early on without having to stand on their own two feet, they lose the appreciation for the effort that it took to earn this money, and eventually lose touch with reality. Not understanding the value of money doesn’t only leave your kids vulnerable to financial crises in the future, but it also builds adults who aren’t as street smart and financially literate as the next person.
So, what should parents do when faced with such a dilemma?
In this situation, there is a balance that needs to be struck between giving your kids enough to be comfortable, and not giving them too much that they lack the desire to accomplish anything of their own.
One way that you can do this effectively is by bequeathing your inheritance to your kids in the form of Trusts. There are several ways that Trusts can operate:
Parents can utilise methods 2 & 3 to distribute their inheritance while ensuring that certain values are kept and practiced by their children. Below are some examples of principal distribution via Trusts commonly used by well-advised parents around the world:
With a little bit of thought and creativity, you too can craft a Trust that lets you sleep at night knowing that your children’s comfort is seen to, while emphasising the values that you and your spouse hold dearly.
Many parents think that giving their children everything they have is an act of love, without realising the damaging long-term outcomes that money and comfort may cause. Bequeath to them instead the knowledge to achieve their own wealth, and you’ll set them up for life.
In fact, you don’t necessarily need to bequeath 100% of your estate to your children. You can always choose to hand them only a portion of your wealth while donating the rest to a worthy cause, such as aid and education for the unfortunate, women’s development charities, or environmental causes. This can be another extension of yourself to express your values and beliefs to your children, while generously contributing to the betterment of society.
Take for example, millionaires like Warren Buffett, Bill Gates and Li Ka-shing who do not believe in bequeathing all their wealth to their kids, and instead, plan to donate a significant portion of their wealth to charitable organisations.
Meanwhile, singer-songwriter Elton John follows Warren Buffet’s philosophy on inheritance – “leaving just enough for your children to do anything, but not enough for them to do nothing”. He plans to leave his children enough to be able to afford a house, car and other basic needs, and nothing else. Bill Gates has announced he is leaving USD 10 million to each of his children, a miniscule portion of his USD 80 billion dollar estate, which will be going mostly to charity.
Remember, life is not about reaching the finish line as fast as you can, it is about the journey of getting there. As parents, we should not deny them of this journey of growth and fulfillment – a journey that they will embark on when pushed beyond the comfort of money.
At the end of the day, the best inheritance you can give your children are an excellent set values, infallible work ethic, and good money habits that will carry them through the thick and thin of this journey.
As the old saying goes, “Wisdom with an inheritance is good, but wisdom without an inheritance is better than inheritance without wisdom.”
The same article also featured in The Star’s website at https://www.thestar.com.my/business/business-news/2019/10/26/are-your-kids-inheriting-too-much-too-soon