Are You Unintentionally Sabotaging Your Estate?
If you’re like many Americans, you’re working hard to make a good living and provide all the perks of life to your children and family members. On the surface, this seems to make sense. Obviously, we all want to take care of the ones we love, but if we really think about it, how much are we really helping them?
One recent study by T. Rowe Price found that 46% of parents have gone into debt to cover children’s expenses and 57% say they spend too much on things their children don’t need. In fact, it’s not uncommon for many wealthy families to have their fortunes entirely squandered by the 3rd generation. That means that your grandchildren will be back in the rat race after all the hard work you put in to secure your family’s estate for generations.
So what goes wrong and how do we learn from the mistakes that these families made?
The Subtle Lie
For many Americans, the goal is to work hard, make and invest money, and provide support and luxuries to their loved ones. To continue providing support to their children even after they are gone, many aim to leave behind a large estate so that their children won’t need to worry about finances in the future.
However, this plan can backfire if their children are never taught how to properly preserve their inherited wealth. Often, children who are raised in the lap of luxury grow up to only be spenders of the wealth that they inherit. These children also pass this bad habit on to their children who replicate it again and again until the family fortune is lost in a fraction of the time it took to earn. Although this may seem shocking, it is common among many wealthy families — so much so that only a few families have gotten it right.
Changing the Way You View Your Estate
Conventional planning has focused on preparing the assets for the heirs when in fact the goal should be to prepare the heirs for the assets. A recent survey of parents showed that only 44 percent take advantage of the opportunity to discuss financial topics with their children most of the time. Another survey showed that 71 percent of parents said they were at least somewhat reluctant to discuss financial matters. So If this sounds like you, you are not alone.
The fact is that kids want to learn about managing money, and they really do listen to their parents when they teach them about it. Over the long run, it’s much more important to teach your child about the value of a dollar, the benefits of hard work, and how to manage budgets than it is to leave them with a large estate. The T. Rowe Price study found that children who discussed finance with their parents at least twice a month were smarter about their own finances than those who did not.
In addition to teaching children about investing and budgeting, it’s a great idea to teach them about debt, banking, and how real estate and loans work. Don’t be afraid to also share your financial mistakes and failures with them as a teaching point. They will listen, learn and hopefully not repeat the same mistakes again.Your financial Advisor may also be a good resource for them. For example, here at FMB Wealth Management, we have our Generational Planning Program to assist our clients in the area.
As adults looking in the rear view mirror, most of us can only dream of having these skills taught to us by our parents. If you are one of the few parents who commit to doing this, not only will you be building a closer relationship with your kids, but you’ll also increase the odds that all of your hard work and savings isn’t in vain. Families that take time to teach their children these skills, and make sure that these skills continue to be passed down, have a very high success rate with holding on to generational wealth and even continue to grow the family fortune.