How much inheritance should you leave your children

A FRIEND had put his son’s name as co-owner of an investment property, as a basic form of inheritance planning.

He and his wife decided to sell the property, and were in the process of signing the sale agreement. Despite not having put a single dollar towards the property, the son said he would sign only if he got half of the proceeds, as was his ‘right’ as co-owner.
In another instance, parents bought a prized real estate asset and overpaid for it. Their idea was to secure a steady cash flow of US$1 million per year for each of their two children, so that they would have financial security for life.

Unfortunately, both children had their own ideas, wanting to live in London and the US, not caring about the tax consequences, and not wanting to work to oversee this real estate asset in Asia. The parents sold it at a loss of more than US$50 million.
Successful parents typically aim to provide financial security for the next generation, to spare them the hardship they themselves went through. However, too many parents go too far in this.

A close friend, 70, was asked by her three children to distribute their share of the inheritance. She dutifully did this, and left for herself what she thought was enough to last to the end of her days. Unfortunately, she developed cancer, and now counts all her expenditures, and flies long haul in economy class to save money. She has not asked the children for financial support, nor have they offered it.

Do we owe our children anything, beyond a good upbringing and education, and perhaps some financial assistance at the beginning of their career? Does a sizeable inheritance make them lazy and without a purpose in life? What about much larger multi-generational wealth?

In Asia, the default family assumption is that all the parents’ wealth will pass on to the children. At the turn of the last century, Andrew Carnegie, a Scottish immigrant who arrived in the United States with nothing, became the world’s richest person after a life of hard work.

After selling his business, he devoted himself to giving his fortune away, and wrote The Gospel of Wealth, where he said: “The parent who leaves his son enormous wealth generally deadens the talents and energies of the son, and tempts him to lead a less useful and less worthy life than he otherwise would.”

The idea that large sums of wealth corrupt future generations and make them “useless” is common to this day. Warren Buffett has said he plans to leave his children enough wealth so that they can do anything, but not so much that they can do nothing.
This seems to be an enlightened viewpoint on how to handle multi-generational wealth, avoiding the ancient Chinese proverb of rags to riches and back to rags in three generations.

Carnegie’s words, echoed by many first-generation wealth creators who came from nothing, are that young people who have no incentive to work are leading lives that are less worthy and devoid of purpose. Some choose to give their money to charity, in the belief that it is the right path to give back, while also saving their children from the evils of money.

Yet, many children equate money from their parents to love and are greatly hurt if it is given away to charity.

My father told me that money to him meant only one thing – freedom to do what he wanted to do at his own terms.

Most may believe that running a multi-family office is all about investment returns. In reality, questions such as how much to give your children, and how to do it so that it doesn’t ruin their lives, are far more important to the first generation.

Having dealt with many such cases, we observe four things that consistently do not work (and yet are done over and over again).

The first step is to define the values of the wealth creators, and put in place a plan that supports the achievement of these goals. The plan could be to leave all their wealth to the kids, or none at all.

In our experience, it is not money that ruins the next generation. It’s the absence of a work ethic.

Let’s take the common practice of rewarding children for every “A” grade they achieve in school. If getting paid money to get a good grade in school is a good system, what happens when the children grow up and the material incentive is absent, or worse still becomes meaningless because of a large sum of inherited wealth?

A 60-year-old study by two Harvard psychiatrists examined the factors in children’s lives that help predict mental illness or mental health. The key finding was that it’s important to develop a good self-image when young.

The best way to do that was to become a self-starter. The ability to motivate one’s self, without the need for external factors like money, was a critical difference in children that went on to live happy and fulfilled lives, versus the others that didn’t.

The best way to give children a good start is to help them internalise the concept of being excellent at something without an external reward. When this is coupled with a large inheritance, with a sense of stewardship for the next generation and to improve the world, magical things can happen.

My wife, whose father couldn’t afford to pay school fees for all four children, took it upon herself at a young age to start working to put herself and her younger sister through school. This self-starter mentality enabled her to overcome poverty and become successful, and she now financially assists the rest of the family.
Instead of rewards for grades, give your children a modest allowance which will teach them how to make financial choices – and that if they want more, they need to work for it. Here are four common mistakes parents make around money and their children.
 

1. Control
• Parenting with your wallet. Making an adult do something they do not want to do (especially if they are dependent on it) does not lead to an authentic relationship. Do you want your kids to spend time with you only because of money?
• Using money as a substitute or expression of love

2. Not talking about wealth or preparing kids for it
• Whether or not you give kids any wealth, it is critical to tell them and prepare them. Validate that you have more than others and that this can be awkward and uncomfortable
• Failing to instil financial responsibility
• Inheritance can bring guilt and shame. Instil the value of philanthropy; giving back significantly reduces the burden

3. Defining success with money
• Research shows nearly 80 per cent of current wealth holders are first generation who created it themselves. The majority grew up in lower to lower-middle class lifestyles. Growing up with limited resources can create desperation, resilience, grit and determination to succeed financially. Expecting or hoping kids who are raised in abundance will have this type of work ethic is not realistic. Successful parents often say this: “My kids are so lazy. At their age, I was working all the time.”
• Parents need to accept that it is extremely likely their children will not match or exceed the level of financial success their parents achieved
• For children, it is paralysing if financial is the only metric of success. If money is the way to make you proud, your kid is set up to fail

4. Raising kids with a lifestyle they can’t sustain on their own
• Consider giving kids at least enough to sustain the lifestyle you have raised them with. This goes hand in hand with not giving your children too much that they haven’t worked for. Too many young kids are already travelling in first and business class
• Many wealth creators want to enjoy the wealth they earned and live a lavish lifestyle. We see many next-gens miserable and resentful to not be given any inheritance; they are completely unprepared to live with less
• Give while you are alive and not just at death

Withholding wealth, a widely accepted approach, can foster long-term resentment in children. Why not instead focus on the next generation’s individual pursuits of happiness, on the challenges that interest them, while instilling in them a sense of stewardship for the family wealth so that it benefits their own future generations, as well as the world around us?

With significant wealth, the first generation has more opportunity than most to make the world a better place than it was before you arrived. How to do it is up to you. What matters is that you do it.

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Source: The Business Times; How much inheritance should you leave your children, 14 August 2024. © Singapore Press Holdings Limited.

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