Money, family finances and inheritances – these are topics many parents prefer not to discuss with their children. Often it’s because they don’t want their children to know their net worth. Sometimes, they fear the choices their children might make if they knew how much they will inherit one day.
While these concerns are understandable, they are small change compared to the troubles that can arise when parents don’t discuss their wealth and prepare their children to manage it. There are ways of approaching the subject without sharing your financial records and providing a detailed breakdown of how you intend your estate to be dispersed. Here are a few of them:
1. Actions speak louder than words
Children learn by example. You can teach them about wealth management from an early age by simply using your money in ways that demonstrate your values. If you wish to teach your children to be charitable, for example, model that behavior yourself, and talk to them about what you hope your financial gifts will accomplish.
2. Provide age-appropriate information
Educating children about money isn’t a one-day seminar, but a lifelong course. It typically begins with a weekly allowance tied to a child’s success in completing simple chores. It continues with regular discussions in which you reinforce the values of work and money management as your children grow. When your children want you to purchase an item for them, allow them to experience the self-satisfaction that comes with saving for it and buying it themselves. Teach them the importance of sharing by encouraging them to donate a portion of their allowance to charity.
When discussing family finances, there is one topic – inheritances – that parents should think twice about discussing, at least until you believe your children are old enough and financially responsible enough to think about it in a mature way. That may not be until they are ready to purchase their first home or have their first child.
3. Under-promise, over-deliver
It’s better to leave a child MORE than they expect rather than less. So be conservative in explaining the size of your estate and your plans for distributing it. And don’t forget to talk about your plans for disposing your personal property.
If there is a chance you may outlive your money, children should be made aware of that possibility, too. In any case, don’t feel obligated to provide hard numbers. A rough estimation should suffice. It’s generally not a good idea to share a copy of your actual estate plan with your children, except for a living will with a healthcare power of attorney that outlines your wishes in the event of incapacitation.
4. Be fair
That does not necessarily mean to divide your assets equally. A child or grandchild with special needs may require a larger share, for example. Unexplained favoritism, however, can be hurtful and feelings of rejection can impact sibling relationships long after you are gone.
If you do choose to leave one child more than another, make your wishes crystal clear in your will to minimize disputes later. To be truly upfront, consider making gifts to your beneficiaries while you’re still alive. Generally, children can each receive up to $14,000 tax-free annually. And there is no limit on the number of people you can give such gifts each year.
The bottom line: You’ve worked hard to accumulate your wealth, and you want it to be used wisely. The best way to ensure that happens is by talking to your children early and giving them the tools to make good choices.
Robert Gray is the senior vice president & director of Private Banking of the Commerce Trust Company.