preparing children for wealth

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Chrysalis
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preparing children for wealth

Post by Chrysalis »

Hi
This is really a question about relationships and money rather than about investments.
Also, I am based in the UK where our trust and tax regulations are completely different (as well as our levels of personal wealth and attitudes to same!) so please bear that in mind.

Ok this is my situation. We have two children aged 10 and 12. We have an averagely comfortable middle class lifestyle for the UK, with professional jobs and a house nearly paid off. I have a public sector job with a good DB pension. Our children attend state (public) schools. We don't have other debts and are generally cautious with money and not particularly into high consumption (although I do like to take regular holidays!).

About 2 years ago my husband's grandparents passed away. They left us each shares in a family business, which a short time later was sold, realising for all four members of the family sums of around a million dollars each. A very welcome boost to my husband's previously very meagre pension pot. We had not been expecting anything like this at all so it did come as something of a shock. We are still working through the implications for our own finances and future. we've moved house, not a dramatic upscale, but otherwise our lifestyles are pretty unchanged (though we've had more holidays).

the difficulty is the children. The way the will was set up means that their inheritances become theirs absolutely at age 25, and any income produced from the capital, including accumulated income, becomes theirs absolutely from age 18. Before they reach age 18, we (their parents) have discretion to use the funds for the children's benefit. We have taken legal advice and there is absolutely no way around this - we can't put the funds into trust past these ages or change the age at which they receive them. So it is left to us to try and prepare and guide them as best as we can, and hope that the money becomes an opportunity for more choices rather than a burden or an excuse for them not to earn a living. (I appreciate that a million dollars is not enough to provide financial independence for an entire lifetime, unless one is very frugal or lucky, but to a young adult, its plenty to bum around on for a large number of years rather than do something more productive).

So I wonder if anyone has any advice about how we should handle this over the next decade or so, either from the point of view of managing such sums, or of receiving large sums in relative youth.

in particular any views on:
1. When, how and what to tell them about the money. We have so far not told them about it and I am minded not to for as long as possible. But at some point they need to know to be able to factor it in to their plans, adjust their thinking and get used to managing it.
2. When, how and what to teach them about managing money and investments
3. How to get the correct balance between not being overly controlling of young adult children, but equally providing appropriate oversight and guidance about investment and spending decisions - particularly in the period between 18 and 25 when they will have to know something (maybe everything?) about the money but will not be able to have access to the capital without our consent.
4. With regard to the latter, trying not to let it become a difficulty in our relationship with them. Thinking back to myself as a young person, I would have resented like hell, any attempts to control 'my' money. Plus, we don't want them to resent decisions we make on their behalf now about spending the money.

Any other views/thoughts/wisdom very much appreciated. This kind of windfall is hard enough for me to deal with (and I'm a mature adult who is actually pretty good with money!)

In terms of the kids 'money personalities' - the older is a hoarder, kind and sensitive, who will probably struggle to spend the money and may have issues with guilt and adopt a head in the sand approach. the younger is exuberant, a total spendthrift with generous impulses, who loves spending money on other people and cannot retain any money for more than 5 minutes! He may also be harder to educate/encourage into a logical approach to money, he's generally rather emotional. he also hates to be controlled in any way (you can tell who I'm most worried about !)
lrak
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Re: preparing children for wealth

Post by lrak »

I'd be as honest with my kids as I could. I'd explain it was left to them and they will get it between 18 and 25. Explain that it sounds like a lot of money. It is. It takes several decades for most people to save that much and if they invest it wisely it will probably continue to grow, but it isn't enough to live on for all their lives. Explain that their great grandparents opened up a world of opportunities that very few people get. They can attend an elite university without debt, buy a modest house in cash, take a lower paying but more meaningful career path, retire at 45, travel the world during summer breaks from college instead of working, etc. Not all of those things but probably two of them.

I'd also explain that I brought them into this world and if they blow this outstanding opportunity on drugs/alcohol, flashy cars, and flashy women I won't hesitate for very long before taking them back out of it. :evil:

I'd have them read the Millionaire Next Door to teach them how a millionaire is supposed to act.
helfordpirate
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Re: preparing children for wealth

Post by helfordpirate »

I have a similar situation though with a lot more discretion over how my wife and I as trustees distribute the fund. Our children are 18 and 23. The sum is decent six figures though significant less than yours.

First thing I would say is that children change a lot from 10/12 to 25! It may seem daunting now for them to have such money, it will probably seem like total madness when they are in the peak of teenage rebellion, but if you get it right they can be reasonably sensible mature adults by 25. I wouldn't worry too much and just focus on bringing them up good.

FWIW we started mentioning that "there was some money put aside for when they were older" in their teens, used their 18th birthday to give them more detail as to the amount and also started distributing income to them. We started distributing the capital when the oldest finished university. So far so good... as far as I know it's still in the index funds and 2-year bank bonds, there's no motor bike in the drive...

If you have discretion over spending the capital you could make a decent hole even in that sum by putting them into a private school - if you believe in that sort of thing! If you are London based, buying a 2-bed starter flat in a decent part of town will finish off the rest! Much harder to be profligate with property than with cash only an ATM keyboard away..

btw In UK law you have two years from death to vary a deceased person's will - though it requires all the beneficiaries to agree - even if you just varied the terms of the trust. But if you have spoken with a solicitor I guess that option is not open either.
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Chrysalis
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Re: preparing children for wealth

Post by Chrysalis »

thanks helfordpirate. Yes, we explored the possibility of a deed of variation, but with beneficiaries who are minors it would require a court order and our advice was that it would not be successful since advancing the age at which they received the money would not be considered in their interests (unless particular specific circumstances prevailed).

Have you had any problems with conflicts with your children over the money? I suppose I worry about particularly the younger one demanding access to the money. And however well we try to bring them up, that doesn't necesarily mean they will be great money managers or behave in the same way as we would. I have adults in my family who have completely different attitudes to mine.

We have thought about buying property in due course, but of course there are downsides to that too - they might not want the inflexibility and responsibiliy of being an owner occupier, or a student landlord to their friends, and I don't think we are really up for managing a buy to let on their behalf. Although it is certainly one way of making the money illiquid and less like just being handed a pile of dosh in the bank.
We have also thought about private school, although it is not what we would want, we are mindful that it is certainly something that the great grandparents would support and I am slightly worried about recriminations from the children later on when they realise that they could easily have paid for it with 'their' money. So we have tried to ensure the older child had the opportunity to consider it when looking at secondary schools - he wasn't interested.

@irak - thanks for your thoughts. I should say that in the UK, it would be pretty unusual for someone to manage to save that amount of money as a cash sum - the average professional family wouldn't come close without inheritance or house equity. It takes them into a realm that will be beyond the understanding of 99% of their peers. So I am also a little wary about how they manage it within their relationships.
sport
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Re: preparing children for wealth

Post by sport »

Spending money is all about choices. As I told my children, you can spend a dollar on anything you want, but you can only spend it once. With this in mind, I would try to give the children choices in making expenditures, starting with small decisions when they are young, and having them make bigger decisions as they get older. You can also show them the money decisions you make, explain why you made the decision, and ask for their input on what you should do. For example, should we take a one week vacation this year and a three week vacation next year, or a two week vacation both years. Once they are comfortable with the idea of making money decisions, the subject of what to do with the inheritance should be a natural progression.

Jeff
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tyrion
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Re: preparing children for wealth

Post by tyrion »

The good news (beyond the fact that you've inherited a large chunk of money!) is that you have plenty of time to teach your children about finances. It sounds like you live a moderate lifestyle, so your children should be using that as a baseline already.

What I like to do with my children (who are a bit younger) is to explain my thinking when dealing with any money transaction.

At the grocery store: "This macaroni and cheese is half the cost of that one, and I think they taste the same" or "I'm buying the organic bananas because they're only 5 cents more expensive than the regular ones, and they taste better".

When stopping for gas: "I would rather go to this station on the way to school instead of the one closer to home because it's 5 cents cheaper. That's not a lot of money, but it does add up over time. Think about how many gallons we get each time, and how often we get gas"

When buying something online: "I don't mind paying more for something if it's a quality item that will last a long time"

You get the idea. Hopefully if you explain your decisions they will learn from it. Over time you can broaden the discussion to include higher education costs, how they might want to spend some of the income from the trust (someone mentioned summer travel - a great idea), and how they might use the money when they reach age 25.
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prudent
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Re: preparing children for wealth

Post by prudent »

This is a very interesting topic. Of course the parents want to do everything possible to ensure their childrens' long-term financial health, but how do to that when the children have no actual life experience?

I don't know that it's possible to "educate" them into frugality and making wise choices. Personal finance is all about perspective, and no matter what you tell a teenager or young adult, they simply do not have enough perspective to make sound financial decisions. If I asked 100 teenagers how long it would take them to spend a million dollars, I would expect 90%+ to say it would take many, many years. That's probably what so many lottery winners thought, but look at how often they end up with nothing in 5 years. They do not have the ability or experience to deal with that kind of money. Maybe the children could relate to that situation.

I wonder how it might work to make a deal with the children: they let you hold 80% of the money for 5 years, and they can have 20% right now and they can spend it any way they want (if they want) and you won't say a word about what they do with it other than give advice if they want it. Perhaps if they are prone to squander it, and see how quickly 20% can get burned up, they might act differently with the other 80%. Of course it would be up to you if you choose to give them the rest of it sooner if they want to buy a house for example. This would naturally be a voluntary commitment on their part since legally they can have it all when the will allows.
helfordpirate
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Re: preparing children for wealth

Post by helfordpirate »

Chrysalis, no we have had no conflict so far. But then we have complete discretion over "when" and "who" and "what" so they don't have a whole lot of leverage on us!
Grt2bOutdoors
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Re: preparing children for wealth

Post by Grt2bOutdoors »

Maybe this applies to you, here's an article on what makes kids money smart: http://www.rutlandherald.com/article/20 ... THISJUSTIN
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staythecourse
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Re: preparing children for wealth

Post by staythecourse »

jsl11 wrote:Spending money is all about choices. As I told my children, you can spend a dollar on anything you want, but you can only spend it once. With this in mind, I would try to give the children choices in making expenditures, starting with small decisions when they are young, and having them make bigger decisions as they get older. You can also show them the money decisions you make, explain why you made the decision, and ask for their input on what you should do. For example, should we take a one week vacation this year and a three week vacation next year, or a two week vacation both years. Once they are comfortable with the idea of making money decisions, the subject of what to do with the inheritance should be a natural progression.

Jeff
Excellent answer. The idea is to get kids to think of money in this fashion AS EARLY AS POSSIBLE. Through repitition it will be second nature they will look at every financial decision the same.

Good luck.
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livesoft
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Re: preparing children for wealth

Post by livesoft »

Practice makes permanent. Are your kids practicing with money now?

In the US, it is very common to give kids an allowance. Also, it is not uncommon for kids starting around ages 13 to 16 to have to buy all their own clothes, pay for their own hair grooming stuff, have a checking account, and an ATM card. At age 16, many kids get part-time jobs; some work before that.
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Topic Author
Chrysalis
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Re: preparing children for wealth

Post by Chrysalis »

Thanks. These are all great tips about teaching kids money management, and they're the kind of thing I would have been doing anyway, regardless of the windfall. (but, not that I believe such training and experience will necessarily make a good money manager out of a spendthrift, actually).

I guess my worries are more about the bigger issues that come with having wealth that is unearned, and of never really 'needing' to stick to a budget. Surely this could really have a negative impact on motivation, work ethic etc. Not to mention potentially making them vulnerable to 'friends' who may only want them for their generosity.

So I wonder if there are any people out there who have experienced a windfall before they became adults, or who have had to help their children in this way?
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Chrysalis
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Re: preparing children for wealth

Post by Chrysalis »

I mean, to put it in perspective - the capital is generating more income than a full time minimum wage job, and they will receive this absolutely at age 18. It's also more than 25 times the average UK wage. (and Mr Money Mustache would say its enough for FI - but in the UK, I'm not so sure). So how do we teach them perspective, respect for the value of money, and self discipline?? why not just bum on a beach in a drug fuelled haze for a decade or two??
GenXer
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Re: preparing children for wealth

Post by GenXer »

Like you, I think it's unfortunate that both will have full access to the money at 18. I was a fairly responsible kid, but didn't really value $ properly at that age. I too have one naturally thrifty kid and one who is (sometimes overly) generous and kind with everything he has, including $. I'm not sure where $1 million I received at 18 would be now ... maybe real estate, which my parents would have probably heavily encouraged.

I don't really have advice to offer in terms of how to talk w/them in a way that is both honest about the privilege/responsibility/pitfalls, but also encourages them to more or less ignore the money until they're older, and to lead a more "normal" young adult life in the world--going to university or working, traveling as a young person in a modest, backpacking-type way, living in modest, shared apartments with friends in their 20s. Do you have any negative examples in your circle of family or friends or even your larger society--older kids who seem to be living off parents well into their 20s and are generally unmotivated, or who have burned through $ quickly and now have little? They might be good examples to point out as well. Good luck!
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Grt2bOutdoors
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Re: preparing children for wealth

Post by Grt2bOutdoors »

Chrysalis wrote:I mean, to put it in perspective - the capital is generating more income than a full time minimum wage job, and they will receive this absolutely at age 18. It's also more than 25 times the average UK wage. (and Mr Money Mustache would say its enough for FI - but in the UK, I'm not so sure). So how do we teach them perspective, respect for the value of money, and self discipline?? why not just bum on a beach in a drug fuelled haze for a decade or two??
How often do you as a family volunteer your time in the service of others? There are many reasons for volunteering your services - you genuinely like to help others, it makes you feel good, you like to share, etc. The benefit in return is seeing others benefit from your help and you usually gain an enlightenment into the plights of others. You only learn from doing, if all you are exposed to are tv, friends and holiday - then one would think that live revolves around consumerism, wasting time and partying, all the time.
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market timer
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Re: preparing children for wealth

Post by market timer »

A million dollars buys a college degree, a luxury car, and a 1BR apartment in a place like London/NYC--a fine start to life. Maybe you can loan them the money for the degree and car, and have them pay you back at age 25, and use the funds to buy the apartment before age 25.
IlliniDave
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Re: preparing children for wealth

Post by IlliniDave »

This is a topic I think a lot about because there's a chance my kids will inherit a large amount of money (relative to what they're used to) when my time is up. Both are grown (one on the cusp of 21, the other 24) and neither are very motivated financially. That's good in that they haven't acquired expensive habits/tastes yet. But neither is familiar with doing anything more than scraping up enough for rent every month. Of course, I get to dictate the terms of how they get the money, and they'll likely be older than your children when it happens. Some thoughts that come to mind.

-I don't know what the children's relationship with their great grandparents was, but I would definitely attempt to impress upon the kids that the money is their legacy--they worked and made some amount of sacrifice over their entire lifetimes to ensure that the children would get this inheritance, and that to misuse it would dishonor that legacy.

-I would also lay out for them a candidate plan for the money and an emphasis for the possibilities that could result from good stewardship.

-If possible, I'd deploy/invest the money that way now, so that they aren't required to "do anything" in the way of investment decisions (which is likely to be intimidating and confusing for one so young given the sums involved, tax implications, and the like). That way the "do nothing" approach gets them started in the right direction. You could also call it their "pension funds" when you discuss it with them, to plant a subconscious seed of considering the long haul.

-Encourage (or coerce) them to dedicate a perhaps slightly disproportionate amount of their education to financial literacy.

-If possible, I'd consider downplaying the fact that they have absolute control of the money at age 25 ("Oops, did I forget to mention that on your birthday 12 years ago. Sorry about that."), or at least take advantage of the age 18-25 period to sort of cooperatively manage the money. That might habituate them to seeking your advice before making big decisions with it in the future, and give them a resource until they get their sea legs.

At the end of it all, there's only so much you can do. They'll ultimately make their own choices, for better or for worse. As a parent the primary thing is providing them with the sufficient knowledge on which good decisions can be made. Lastly, remember they are individuals who will cultivate their own hopes and dreams, which may diverge from your sense of the optimal approach. Short of using the money to destroy themselves, you'll have to let them fly on their own--you don't want to ruin the relationships over the money.
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richyg12
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Re: preparing children for wealth

Post by richyg12 »

Crysalis,

"So how do we teach them perspective, respect for the value of money, and self discipline?? why not just bum on a beach in a drug fuelled haze for a decade or two??"

Googling "Kerry Katona" might be enough to address all of the points above.

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Meg77
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Re: preparing children for wealth

Post by Meg77 »

My grandparents put money aside in trust for me starting the day I was born. I don't get control of the account until I'm 35, but I was told about the funds (which were roughly $500K at the time) when I was 18 and starting to ask about financing college tuition. I was already interested in personal finance and read many investing books, but my siblings weren't as fascinated and still ended up acting pretty much the same as me (though as the eldest, I did set the standard). We all used funds as they were originally intended - to pay for college - but the unofficial rule was that outside of educational expenses and home purchases, the money wasn't meant to be just lived off of or spent frivolously. My sister is saving the rest of hers for her kids' educations one day. The rest of mine will sit and grow similarly unless I have some emergency. We didn't have near enough to live off so it's not a real temptation - just a nice safety net. And it may not throw off as much income as you expect depending on how it's invested.

I requested and recieved a monthly allowance from the fund during college as well as paid for a car, sorority dues, studying abroad, and a few spring break trips from the fund. I secretly asked for more than I needed and used the money to max out a Roth IRA and to accumulate my own savings that I could control. I wasted some, learning a tough lesson about lending money to a boyfriend, but in general I was eager to accumulate as much as I could. I lived well, but my tastes weren't crazy as I'd grown up pretty middle class. After school I accessed the trust for down payments on a condo, then later on a few rental properties. I also always maxed out retirement accounts even though at first I had to tap those funds to do so. I appreciated having some say in how the funds were invested as I learned more about index funds and investing, and I think getting some sizeable (to me) but relatively small (to the total account) distributions early on allowed me to learn some lessons without putting the whole pot at risk. Goodness knows what I would have done with it if I were surprised by getting the whole fat chunk handed to me at once with no warning. Even though I am a saver I may have invested it unwisely at best.

No matter what happens, I would urge you not to beat yourself up about the possible outcomes. Money brings with it options, and the pressure to choose the absolute best one whether it be where to live or where to go to school or what dress to buy. One thing I noticed that this gift from my grandparents did was liberate my parents from having to figure out how to split their assets between all of us - how much to give for college, how to keep things even when it came to wedding planning, etc. The portions given to my parents have also freed me and my siblings up mentaly to plan our lives without having to worry about my parents needing my financial help in their old age. These are great blessings and freedoms. They cut you off from the responsibility but also the ability to manage your kids' lives and control them with money. This could have been bad had I been a raging drug addict, for example. But people must be free eventually to make their own choices and it would not have been my parents' fault had I chosen that path.

Your husband's grandparents put the kids in this situation, which is mostly a blessing but could (like every situation) end up causing some painful lessons learned. When your kids are 25, they will no longer be children. If they squander their inheritances, that will be their problem and honestly you should endeavor not to care about that possibility. Do your best to educate them of course, and make sure they understand is that this is ALL THERE IS. Once they are older tell them in no uncertain terms that this is one big opportunity and that they can waste it, give it all away, invest it, or use it to attract some gold-digger spouse who may make their lives heaven or hell. Whatever happens, you will not bail them out or give them any more money, ever. Then sit back and enjoy the show...
"An investment in knowledge pays the best interest." - Benjamin Franklin
puissant
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Re: preparing children for wealth

Post by puissant »

I, sadly, have only limited experience with having manna from heaven dropped on me at 18. Certainly nothing like what your children will receive, but more of a help with the home down payment kind of sum instead of a lifestyle changing sum. Like anything in parenting, I think the best advice is to lead by example. I might even say to live below your means. If your children are used to elaborate, expensive, exotic vacations and cars expect them to want to continue it when they turn 18. Now you don't need to go overboard, don't make them pine so much for "stuff" compare to their peers that they unleash an avalanche when they turn 18. Just be reasonable. Don't give them everything they want. Don't give yourselves everything you want. If you show that you value money, hopefully they will see that and replicate it.

I would also suggest that you encourage your children to think big about these funds. At 18 I think it's easy to underestimate how expensive things are for adults. At 18, a $2,000 vacation is expensive. At 36, its the $500,000 house that is expensive, retirement is expensive, childcare is expensive. Yes, it's fun to buy an expensive car at 18... and maybe another more expensive one at 22, but give them a sense of how many cars they might be buying.

You might also want to consider suggesting some money that they can spend. Certainly when that money does show up in their bank account there will be an urge to spend it. I have that same urge when a bonus check arrives. Instead of trying them to get them to ignore human nature, help them control it by suggesting responsible spending of the money. Maybe they buy a car, or a take a year off etc.

Another thought is to look at their peers. I was raised around peers who wouldn't necessarily have looked up to someone who just received wealth. Encourage them to be private about their spending and their wealth and help them understand that while they can get enjoyment out of their money it isn't something worth showing off or being proud of. After all its not even money they "earned" themselves.
msj16
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Re: preparing children for wealth

Post by msj16 »

For me, I only figured out that a million is not actually that much money (not enough to be very rich), when I learned about the 4% rule. Knowing that one can only generate 40,000 off of a million, and not for a whole lifetime was sobering. I would help them plan by discussing the practical parts of life -how expensive it is to live in London, how much it would be to buy a flat, etc....Cheers to their good fortune!
Texas hold em71
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Re: preparing children for wealth

Post by Texas hold em71 »

msj16 wrote:For me, I only figured out that a million is not actually that much money (not enough to be very rich), when I learned about the 4% rule. Knowing that one can only generate 40,000 off of a million, and not for a whole lifetime was sobering. I would help them plan by discussing the practical parts of life -how expensive it is to live in London, how much it would be to buy a flat, etc....Cheers to their good fortune!
Since they are so young, the money could easily be worth 2 to 3 million by the time they receive it but inflation will eat through that as well. I do think they will need to learn (from you most likely) about a safe withdrawal rate and how long the money can be projected to last. That is within the comprehension of a university student.

I know several adults with similar trust funds and they all lead productive lives, pulling only minimal amounts from their trusts knowing it won't last forever. Maybe coming of age during the bear market suppressed their balances enough to make them understand that. Not sure. I think they have enough that they worry less than the average person and they can escape an unpleasant job if needed.
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auntie
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Re: preparing children for wealth

Post by auntie »

How about starting a family tradition of playing the game of "what would you do if you had a million dollars?" You could gradually show them what happens to the million when it's used in different ways, You could discuss what happens to lottery winners who aren't prepared to deal with their sudden wealth, and what happens to money invested conservatively for many years.

You might find out that after three or four Saturday evenings of playing the game that nobody wants to do it anymore, but it might catch on and be an enjoyable learning experience.
High risk does not equal high reward. It equals high risk of no reward.
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Chrysalis
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Re: preparing children for wealth

Post by Chrysalis »

Many thanks for all for further suggestions, especially Meg77 for her personal experiences. I expect I'd have been a lot like you if I'd been in your situation! Do you resent at all the fact that you don't get full control until you are practically middle aged? Or is that much more usual in the US?

I think the reason I have difficulty with all of this is because it is ultimately about power and control and values about money, and that most difficult of things, allowing your children to be different from you. When I was growing up, my family culture was very much against giving money with strings attached, so whatever I was given by my parents (which was plenty, but never so much to put me off working) was always given absolutely for me to do with as I pleased. I would have deeply resented anything else. I certainly can't imagine taking investment lessons from my parents!

So one of the things I really wrestle with is how much to tell the children and when. IlliniDave, I really understand the temptation to 'forget' to hand it all over at age 25, but I worry that that could end up in a bit of a tangle- how would I explain to them when I actually did hand it over, and they discovered I'd kept them from their legal entitlement? I have been contemplating at 18 just giving them the accumulated income and the current income, and for them to manage on for their college years, and then only telling them about the bulk of the capital a few years later. However, I have doubts about that too -surely they will be curious and ask questions, and I am not sure I would be able to tell them only half the truth. And, as adults, they would be responsible for their own tax returns so they will have to know everything relevant for that. So, those are the things I wrestle with.
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Re: preparing children for wealth

Post by downshiftme »

I expect to face similar issues with my own investments, as my safety net is having more than I need, which means kids should get 1+ million each unless unexpected final expenses exhaust my stash. Among my siblings who received very modest (5 figures) windfalls from parents or grandparents, the results were all over the place. Some spent almost immediately, some saved part, some invested the whole lot and paid 100% for their own kids' educations decades later. Of these outcomes, I'd like to encourage the last or similar behavior as much as possible. To that end, I'm trying to establish the idea that windfalls like an inheritance are for investing the capital and consuming at most 4% per year, or even less for the really long haul. I socialize that idea. As high school and college students, I funneled some money through accounts in their name and we practiced doing their taxes together, leaving the money in the accounts for specific purposes (college tuition) and handling the investments and earnings responsibly. It was their money and they could have taken it and blown it, but we modeled being responsible and hopefully that's what they remember as a default habit. I occasionally mention my own plans for retirement without specific amounts but with basic strategy - I cannot count on others or future promises like a pension or even government assistance - to care about my own finances as much as I do. I hope that if I establish the idea that money received from a life's work, even an ancestors life's work, is treated with respect and care as a long term investment, in hopes that that when they encounter such a thing in their own lives that will be how they think of it. I also have specific letter of instructions they will inherit at the same time that reinforces the idea that this is given to them with trust that they will do the right thing, even if it is not specifically entailed as a "trust fund" with restrictions.

I have also parked much of the money in accounts that will require next to no actions on their part to leave it invested, and even reinvesting income. I hope to make the precedence as easy to follow as possible to encourage responsible behavior, even if they receive the wealth before they have the life experiences to fully understand it. I hope this buys time for them to mature as well as makes it easy to be responsible by default.
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ryuns
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Re: preparing children for wealth

Post by ryuns »

There are minimal restrictions on the money, you say, but I wonder if there is an option to put up a roadblock or two if it so happens that you think they'd benefit from it. For instance, I received an inheritance (a fraction of the size, but certainly nice to have) that sat with a financial advisor. Knowing about finance and being a Boglehead, I wasn't thrilled at him charging for it (though it wasn't a bad deal, and he's been in business with my family for decades). I don't know how the inheritance was structured, but I do believe the money was technically mine without restriction at 18--however, since it's with the financial advisor, the unofficial party line has always been that it was meant for "legitimate" expenses, like college, a house, or a non-frivolous car. I didn't need it for college, so ultimately used it as part of a house payment. If your kids were irresponsible. Best of luck.
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slopecarver
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Re: preparing children for wealth

Post by slopecarver »

Maybe discussions about spending aren't the right focus, I mean they are great talking points but what might really get them salivating is you teaching them about compounding interest. When the oldest turns 18 start giving weekly financial lessons, Give some examples starting today with one dollar, 10 dollars, 100 dollars... up to a million dollars and what it would mean for them at their retirement age.They might be interested to hear that they will be guaranteed multimillionaires if they don't touch the money by age 25 and by retirement age will be well into the 8 figure worth range. The next hardest part would be explaining inflation to them.
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Re: preparing children for wealth

Post by IlliniDave »

Chrysalis wrote: So one of the things I really wrestle with is how much to tell the children and when. IlliniDave, I really understand the temptation to 'forget' to hand it all over at age 25, but I worry that that could end up in a bit of a tangle- how would I explain to them when I actually did hand it over, and they discovered I'd kept them from their legal entitlement? I have been contemplating at 18 just giving them the accumulated income and the current income, and for them to manage on for their college years, and then only telling them about the bulk of the capital a few years later. However, I have doubts about that too -surely they will be curious and ask questions, and I am not sure I would be able to tell them only half the truth. And, as adults, they would be responsible for their own tax returns so they will have to know everything relevant for that. So, those are the things I wrestle with.
Truth told, Chrysalis, that "suggestion" was somewhat tongue-in-cheek. I certainly don't mean that you should do something in blatant violation of the estate's directive. With what you described there's the transition starting at age 18 where they get the earnings from the inheritance. At that point I'd maybe bring them in and tell them their great-grandparents left this and you get the income it throws off (in the US they'd probably have to start filing their own taxes on the income at that time anyway, perhaps sooner, not sure how that works for you, and we're only taxed on income, not on the assets themselves). I don't know what the age of majority is for you either (here in the States it's either 18 or 19 depending on the state) so they presumably have full use of the income at that point, but are constrained regarding the principal. From there you can guide them as best you can, and as you alluded to, you'll have to be sensitive to their individual nature. Were I in the same situation at age 18, I'd have been rather inclined to heed my parent's advice (at that age I did heed their financial advice). But we're all different.

What I'd be reluctant to do at that initial point (age 18) is tell them, "Oh, by the way, all the money is yours to do with as you please on your 25th birthday" (unless the estate somehow mandates they be informed at that time). If they press you on it you'd eventually have to come clean, I suppose, but maybe they'll be initially content with the income and not push for the principal and come to value it (the income) enough over time that they decide on a conservative stewardship approach down the road. That's of course a case of we parents wanting to impose (or pass along) our values to our children, which is just something we do by nature. Sometimes it doesn't work. I really do think the biggest thing is, as I said before, is to not let differences in opinion over ultimate use of the money burn bridges in the family relationships. Be ready to let go and try not to beat yourself up too much if it doesn't go according to how you'd like it to turn out for them. That's a road I've been down and it's difficult (although the difference in opinion in my case wasn't about money).

Edit: Your thoughts about allowing them to manage the accumulated and ongoing income through college I think have some merit. I'd give a lot of consideration to something along those lines. Maybe going "broke" between 18-25 (if they're so inclined) would provide an outstanding lesson, especially if they were unaware there was a bigger windfall around the corner (or at least had to wait on lean rations for a couple years for it to arrive).
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Meg77
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Re: preparing children for wealth

Post by Meg77 »

Chrysalis wrote:Many thanks for all for further suggestions, especially Meg77 for her personal experiences. I expect I'd have been a lot like you if I'd been in your situation! Do you resent at all the fact that you don't get full control until you are practically middle aged? Or is that much more usual in the US?

I think the reason I have difficulty with all of this is because it is ultimately about power and control and values about money, and that most difficult of things, allowing your children to be different from you. When I was growing up, my family culture was very much against giving money with strings attached, so whatever I was given by my parents (which was plenty, but never so much to put me off working) was always given absolutely for me to do with as I pleased. I would have deeply resented anything else. I certainly can't imagine taking investment lessons from my parents!

So one of the things I really wrestle with is how much to tell the children and when. IlliniDave, I really understand the temptation to 'forget' to hand it all over at age 25, but I worry that that could end up in a bit of a tangle- how would I explain to them when I actually did hand it over, and they discovered I'd kept them from their legal entitlement? I have been contemplating at 18 just giving them the accumulated income and the current income, and for them to manage on for their college years, and then only telling them about the bulk of the capital a few years later. However, I have doubts about that too -surely they will be curious and ask questions, and I am not sure I would be able to tell them only half the truth. And, as adults, they would be responsible for their own tax returns so they will have to know everything relevant for that. So, those are the things I wrestle with.
I don't resent the controls on the funds at all. I didn't earn the money and they didn't have to give it to me; who am I to oppose whatever controls they put in place, whatever investment allocation they chose, etc? I will say my situation is somewhat different because my grandparents are still alive and well. So even though my uncle was trustee of my funds (and my mother was trustee for my cousins), the people who earned and subsequently gave the money to us were around to guide us as to how they intended it to be used. I think 35 is a common age for full controls to be given of trusts; other trusts in the US commonly say age 21, or even attach controls to life stages like graduating from college or getting married. My grandfather explained that when we were young and they were deciding on the age limits they were worried one or more of us might be irresponsible or into alcohol or drugs at a younger age so they made it higher. Plus they wanted us to have to get used to working and get our educations before getting full access.

I didn't have to, but I always consulted my grandfather about the investments I was considering (with rental property) and copied him on emails to the trustee requesting various increases to my allowance while in college (I used to write out full detailed budgets to justfity my small requests; I only realized years later they were likely discarded with a laugh).
From the minute I heard about the money I was told "this was set aside for your education" and so that was the expectation - to use the funds for college, grad school, etc. Even though there was more than enough in there for that, and even though the documents never laid that out as a requirement, I still think of it as my "leftover college fund." My parents and grandparents also led by example and were very humble people with relatively modest tastes. So blowing the money on fancy cars and such was so far off my radar - but then we grew up in a fairly rural area too without a designer store for many miles. Keep in mind they will really only know what you tell them - they aren't going to be poring over copies of the trust agreement or whatever documents there are.

From a legal perspective you'll probably be required to tell them about the money and make formal disclosures when they turn 18. LIkely they'll have to sign something saying they've been informed they are entitled to XYZ income, etc. But teenagers do a lot of dreaming and planning whether about education or career ambitions. It might be wise to allude at least a bit as to their resources when they are as young as 15 and 16 so they can think about plans within an appropriate framework. If one child loves dance or some other low-earning field, he may be glad to know he can freely pursue it without having to risk poverty.
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Greentree
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Re: preparing children for wealth

Post by Greentree »

Warren Buffett was obsessed with what to do with his children and money. He did not want them growing up lazy. His conclusion was to give them enough money "to do anything they want, but not nothing."

He determined this amount was 500k some years ago. Buffets children all ended up hard working and pursuing very different paths. Point being, a million is about that level, anything they want just not nothing. The best thing they could do with the money is use it to provide freedom. The worst thing would be to blow it on stuff they don't need.

I would try to look for ways to teach them how money buys options and ability to passionately pursue a path. Their fuel will be finding something they want to do. If they see that, they may be less likely to blow it.
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Re: preparing children for wealth

Post by letsgobobby »

I do not have an answer for you nor do I envy your situation. Our estate plan is set up in such a way that our kids would inherit in thirds: at ages 25, 31, and 35. They'll be a little older, but more importantly they'll get three chances to figure it all out. They can blow it once, even twice, and still make out ok. Neurologically most 18 year olds are not capable of making very long term decisions based on delayed gratification.
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Re: preparing children for wealth

Post by bsteiner »

letsgobobby wrote:...Our estate plan is set up in such a way that our kids would inherit in thirds: at ages 25, 31, and 35. They'll be a little older, but more importantly they'll get three chances to figure it all out. They can blow it once, even twice, and still make out ok. Neurologically most 18 year olds are not capable of making very long term decisions based on delayed gratification.
Our clients typically provide that the child gets effective control at a specified age or ages, but we don't mandate that the trust assets be distributed. By allowing the trust to continue (with the child having effective control), the inheritance won't be included in the child's estate, and will be better protected against the child's creditors and spouses.
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Chrysalis
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Re: preparing children for wealth

Post by Chrysalis »

Bsteiner - trust law and taxation is very different in the UK. The money will become theirs absolutely at 25 - the current trusts will cease to exist. New discretionary trusts could be created, but the children would have to set them up themselves. the taxation of discretionary trusts is so unfavourable that I doubt whether there would be benefit to it - but, we'll take advice on that nearer the time, as tax rules change pretty frequently.
From what I've read, trusts are much more flexible and widely used in the US. Here, not so much.
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Re: preparing children for wealth

Post by curmudgeon »

My view is that if the kids haven't figured out how to handle money by age 25, they aren't likely to do much better at any later age. My kids pretty much ran their own financial lives from age 18 on; they started transitioning to handling their own money from part-time or occasional work at around age 15.

The tricky part here would be the age 18 stage. If all the accumulated income up to that point (6-10 years) moves under their control, that would be a fairly large sum. It may be that the grandparents weren't really anticipating the early sale of the company when they set this up. I would probably start taking the kids into active involvement in manageing the accounts at around age 15. Discuss with them how the money is invested and monitor how it is doing. Discuss some of the challenges of being a trustee. Talk about how the inheritance has affected your (and their) lives in terms of house/vacations. Help them think about the implications on relationships with their peers (there can be significant problems) if they brag or otherwise talk about the inheritance. Essentially, you want to lead them into seeing this as both a priviledge and a responsibility. What you would like to do is have the controlled at 18 years portion of the inheritance effectively on a sort of autopilot when it transitions to that kids control. Have them in the mindset that "ok, the income from this block of money will pay for my university costs", rather than "I've got this big chunk of money, how do I spend/invest it?"
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Re: preparing children for wealth

Post by bsteiner »

Chrysalis wrote:Bsteiner - trust law and taxation is very different in the UK. The money will become theirs absolutely at 25 - the current trusts will cease to exist. New discretionary trusts could be created, but the children would have to set them up themselves. the taxation of discretionary trusts is so unfavourable that I doubt whether there would be benefit to it - but, we'll take advice on that nearer the time, as tax rules change pretty frequently.
From what I've read, trusts are much more flexible and widely used in the US. Here, not so much.
There are tradeoffs in both countries. If I understand correctly (please correct me if I missed something -- I always bring in UK counsel whenver we have an actual case with UK tax aspects), trusts in the UK pay a 6% tax on the value of the trust assets every 10 years, whilst assets owned outright pay a 40% inheritance tax at death. The UK inheritance tax nil rate band (exempt amount) is £325,000 (about $500,000), so it affects more people than the US estate tax which currently has a $5.25 million exempt amount. However, you can avoid the UK inheritance tax by making outright gifts during lifetime if you live for 7 years from the date of the gift. If that's reasonably accurate, it might still make sense to leave assets in trust rather than outright, since the additional cost of 6% every 10 years (essentially 0.6% per year) gives you a considerable degree of flexibility and asset protection.

In the US, the estate tax only affects a small number of taxpayers. Trusts generally pay income tax at a higher rate than individuals. However, leaving assets in trust rather than outright likewise provides flexibility and asset protection. That's why our clients generally provide for their children in trust rather than outright. In most cases, the child gains effective control over his/her trust at a specified age. We don't mandate that the trust end. However, the trustees can distribute any or all of the trust assets to the child if they think that makes the most sense.
lostInFinance
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Re: preparing children for wealth

Post by lostInFinance »

bsteiner wrote:
In the US, the estate tax only affects a small number of taxpayers. Trusts generally pay income tax at a higher rate than individuals. However, leaving assets in trust rather than outright likewise provides flexibility and asset protection. That's why our clients generally provide for their children in trust rather than outright. In most cases, the child gains effective control over his/her trust at a specified age. We don't mandate that the trust end. However, the trustees can distribute any or all of the trust assets to the child if they think that makes the most sense.
At least in the US, I don't think your child can have "effective control" over the trust and asset protection. It's one or the other.
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Re: preparing children for wealth

Post by bsteiner »

lostInFinance wrote:At least in the US, I don't think your child can have "effective control" over the trust and asset protection. It's one or the other.
The child can be a trustee, can have the power to remove and replace his/her co-trustee (provided the replacement is not a close relative or subordinate employee), and can have the power to appoint (give or leave) the trust assets to anyone other than the child or his/her estate or creditors. That provides effective control, whille still keeping the trust assets out of the child's estate and protecting the trust assets against the child's creditors and spouses.
lostInFinance
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Re: preparing children for wealth

Post by lostInFinance »

bsteiner wrote: The child can be a trustee, can have the power to remove and replace his/her co-trustee (provided the replacement is not a close relative or subordinate employee), and can have the power to appoint (give or leave) the trust assets to anyone other than the child or his/her estate or creditors. That provides effective control, whille still keeping the trust assets out of the child's estate and protecting the trust assets against the child's creditors and spouses.
What are some of the cases that show how well these trusts with the child as trustee/co-trustee, with the power to replace the other trustees, have held up against creditors and tort claimants in appeals court?
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Re: preparing children for wealth

Post by mlipps »

Chrysalis wrote:Thanks. These are all great tips about teaching kids money management, and they're the kind of thing I would have been doing anyway, regardless of the windfall. (but, not that I believe such training and experience will necessarily make a good money manager out of a spendthrift, actually).
I don't know if that's true. I'm DEFINITELY a spend thrift by nature, as well as have a tendency to be overly generous with gifts. I grew up just barely middle class but am now 23 & married by pure luck to the love of my life, who makes nearly 6 figures. A near fortune compared to my own upbringing. I definitely think my parents repeated and constant money lessons have helped me rein in my spending habits. It's not exactly the same as getting a windfall, but it sure feels like it to me some days. I think the biggest thing my parents taught me to do is to respect people who live within their means & plan for the future, instead of being impressed by big houses & fancy toys. It definitely helps me keep my head on straight when I see peers buying things that I want but realize they can't afford.
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Re: preparing children for wealth

Post by thebogledude »

I think the popular lesson is to open a savings account for the kids and teach them about saving and the power of compounding interest and then teaching them about stocks and bonds at a later age. At 18, that is when you want them to manage a little money and by 25 that is the proper age for them to make their own financial decisions in life.
Last edited by thebogledude on Sun Sep 29, 2013 10:54 pm, edited 1 time in total.
SDBoggled
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Re: preparing children for wealth

Post by SDBoggled »

Great problem to have and good thing is that you have a lot of years to prepare them :-)
We had a similar (smaller amount) situation at 21, like you I was very concerned that 21 may be too young to do the right thing and wished grandparents had set an older age.

Luckily most of the groundwork was done as we did not have as much notice.

1. Fixed budget and choices from 12 years
2. Expectation that they would earn spending money through college (we covered tuition, living, texts)
3. Continuous expectation earn then save then spend and choices must be made.
4. Left the info about inheritance until less than 12 months before as I did not want it to change college behavior or job search
5. Set expectations that grandparents worked hard and saved their money and would not have wanted you to spend on depreciating assets.
6. Reminder that "What you earn, save and spend is your choice" still applies to your earned $, but you are very lucky and should be careful custodian of grandparents $$$.

This has been well accepted so far.
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Chrysalis
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Re: preparing children for wealth

Post by Chrysalis »

thanks again all for thoughts. bsteiner, I'm not an expert in UK trust taxation, by any means. My feeling is that trusts are most often used in the UK to reduce inheritance tax; however the assets held in discretionary trusts are subject to high income and capital gains tax rates - as well as the periodic tax charges you mention. I have to say I don't see inheritance tax as being a big issue at this stage for my children, but of course, nearer the time it would probably be appropriate to get sufficient information/advice so that they can decide whether they want to set up new trusts for any of the funds. It will be their decision though.
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Re: preparing children for wealth

Post by bsteiner »

Chrysalis wrote:thanks again all for thoughts. bsteiner, I'm not an expert in UK trust taxation, by any means. My feeling is that trusts are most often used in the UK to reduce inheritance tax; however the assets held in discretionary trusts are subject to high income and capital gains tax rates - as well as the periodic tax charges you mention. I have to say I don't see inheritance tax as being a big issue at this stage for my children, but of course, nearer the time it would probably be appropriate to get sufficient information/advice so that they can decide whether they want to set up new trusts for any of the funds. It will be their decision though.
I'm not an expert in UK tax law either. I always bring in UK counsel whenever there's a UK aspect to the planning. I think I know enough so I can discuss the matter appropriately with UK counsel.

In the US, gifts during lifetime count against the estate tax exempt amount. If my understanding is correct, if you make outright gifts in the UK, there's no tax at the time of the gift (whereas if you make a gift in trust, there's a tax when you make the gift), and if you live for 7 years from the time of the gift, the gift doesn't count for inheritance tax purposes. If that's correct, people would make more outright gifts during lifetime in the UK than in the US.

If I recall correctly, didn't the Queen Mother make substantial gifts to or in trust for (before the enactment of a tax on gifts in trust) Prince William and Prince Harry a little more than 7 years before she died, thereby avoiding transfer tax on those gifts? Of course, for most people, waiting until you're in your 90s to engage in estate planning techniques that require you to survive for 7 years is risky.

Again, since I don't practice UK law, please correct me if there's anything I missed.
lrak
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Re: preparing children for wealth

Post by lrak »

bsteiner wrote:In the US, gifts during lifetime count against the estate tax exempt amount.
Unless the gifts are under the annual exclusion amount. You can give anyone you want a gift of up to $14,000/year with no tax/estate implications. That is how I got my "inheritance" from my grandparents. For a dozen years after my grandfather died, my grandmother gave her daughters, son in laws, and grandkids a check for $10k as Christmas presents.
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Chrysalis
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Re: preparing children for wealth

Post by Chrysalis »

Well, we're drifting off topic here, but if you're interested, the annual gift allowance in the UK is £3000 (about $5000) for all of your gifts (not for each recipient).
And yes, inheritance tax of 40% is payable on estates worth >£325k (about $500k).
Outright gifts become free of inheritance tax after 7 years. So yes, I think outright gifts are used more than trusts for transfer of wealth without inheritance tax - certainly I don't know anyone who has a 'trust fund', nor is it something you read about in financial pages or blogs. So, way out of my experience or comfort zone - we've certainly been on a steep learning curve the past 2 years!
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Re: preparing children for wealth

Post by sesq »

Your children are going to have to learn a lot about choices and purpose. I agree the amount isn't quite set for life money (although it could double by the time they reach 25, which would be getting closer). When I was 22 I had a somewhat grisly accident where I lost my left leg below the knee. There was a lawsuit, and I remember discussing with my law professor (undergrad) that I was a bit befuddled since college had been to prepare me for a career, and that immediate need could be negated by a settlement. I had studied to be an accountant, which isn't usually a passion profession, but if the settlement was large enough I could have a lot of choices in front of me. It kind of messed with my head a bit.

Reality was the litigation took over seven years, and the net amount was nowhere near seven figures, and I am a productive accountant today. But I think in addition to learning not to blow it, your kids will have a challenge with "what do I want to be when I grow up". Its a tough balance to give them the information that they will have choices, without sapping their ambitions and the need for purpose. If it were me, I think I would let them know in their teens they aren't restricted in their education choices, and let them know that they will likely have some money left over after college left by their grandparents when they turn 25. When they ask how much, I would try to phrase it as enough to get you started, not enough to rest on your laurels.

I'd also try to teach them a lot of details about their grandparents so they can learn about where this came from. And how important it is to honor the legacy (and not blow it). I would imagine that may be more tangible than a financial record with a number.
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Re: preparing children for wealth

Post by reggiesimpson »

Lots of good advice here. I normally recommend reading "Beyond the Grave" by Condon and Condon lifted from this forum recently and/or advice from bsteiner. You are in the UK and that gives a different estate spin so here goes.
While my children will not inherit a very large sum of money at 25 they will later on. They know we are not poor just based on where and how we live compared to the rest of society. And at some point in the future they will acquire a large sum through insurance, inheritance proceeds and Trusts. They know this but i have not discussed the total dollars involved. I have discussed, with my 25 yr old son, in partial detail some of my sons accounts and the insurance after he got a full time job. My daughter is 22 and finishing up school and i will discuss the same material with her at a later date.
It has always been a concern that my children would choose a wastrel life as they became more "aware" of their position. This is a very common fear of parents in the same situation. We approached this by emphasizing frugality throughout their lives and by not overspending ourselves. I emphasized the different views people have about their own earned money (its more precious) vs inherited or lottery money with its tendency to spend it more easily. I personally drilled into them the need to preserve their capital at all costs because once the money is gone its very difficult to replace it. So far so good. The main emphasis i would suggest is how you yourselves deal with money. It will be both subtle and overt to your childrens experience with you over the next 12 and 15 years. Realize that some of this is a crap shoot as you will not be their sole influence as they get older. Good luck.

ps dont forget to recommend they read Bogleheads regularly!
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Chrysalis
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Re: preparing children for wealth

Post by Chrysalis »

Thanks again all.yes, it is slightly doing my own head in (ie our own legacies and the choices they now permit)!
We will be giving them information about their grandparents and how the money was made- at least they are old enough to remember them.
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frugaltype
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Re: preparing children for wealth

Post by frugaltype »

I would bring them up as best you can to be good people with financial common sense. 25 is pretty much an adult. What they do at that point is their decision. I assume that before then, some of the money will likely go to college expenses. I would be conservative about managing the money. You don't want to tell them at 18, by the way, you had an inheritance but we blew it.
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tom0153
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Re: preparing children for wealth

Post by tom0153 »

Young people in the US are not that well educated when it comes time for financial learning. It has been an unfortunate mess of learning by poor example more often than not.

To try to turn that around, there is pressure on the schools, and some of them have appropriately responded.

The gap is filled by our extension institutes, which were at one time intended to teach farming, to teach family economics in small communities, etc, but now have taken a big jump into urban learning.

You should be able to access most of these, they are run by the states or a national network, and often supported by the Federal government (which sites are currently shut down due to the Congressional dilly-dallying).

Take a look at this site, and at "Jump$tart Coalition," which is the program intended for youth; you may find other good stuff elsewhere on the site. I think you may easily be able to adapt some of the learning to your own situation.

See: http://www.uwyo.edu/ces/money/

There is also a link to the national institute from that page, you arrive at: http://www.extension.org/personal_finance Some of it might be repetative. There is a national page for Jumpstart, too, at http://www.jumpstart.org/

I think you would have plenty of time to come up with your own education plan, including a way to deal with each child according to their own personalities.
Best, Tom
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