Are Parents Obligated To Pass On Generational Wealth? Here’s What One Expert Says
Written by
Addie Johnson Talbott
Edited by
Amber Barkley
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If they can, parents should always leave or give money to their kids, right? Well, maybe.
The United States is experiencing one of the largest generational wealth transfers in history. Over the next two decades, $84 trillion will flow from the eldest two generations to their Gen X and millennial heirs. These younger generations have seen their salaries and buying power shrink throughout their adult lives. For that reason, this incoming wealth may feel like a lifeline, enabling them to buy a house, retire on time or help care for their own kids and aging elders.
The Wealth Doesn’t Last
Ninety percent of wealthy families will lose their wealth by the third generation. According to William Huston, CIO and founder of Bay Street Capital Holdings, one reason for this is the decreasing proximity to the struggles it took to create the wealth.
“Children who receive the benefit of that wealth know what their parents sacrificed for it,” he explained. “They were very close to the decisions that were going on in the household. So, the values and mission stay intact for the most part.”
Grandchildren and great-grandchildren, by contrast, lose this perspective, because they have never known a life without affluence.
Of course, many parents won’t be able to leave a fortune to their heirs. In the U.S., the top 1% leaves an average of $719,000, while the bottom 50% only passes on $7,900. But for those with anything to give, it’s worth examining what might feel like an automatic decision. Should parents feel obligated to pass wealth on to their children? How should parents plan for these financial and emotional decisions?
Ways To Pass Down Wealth
First, here’s a look at four ways to go about it:
- Give when children are young: This could mean paying for education costs or a down payment on a home.
- Give at time of death: One common way of passing down wealth is in a will or trust, a real estate transfer, etc., after you pass.
- Do a little of both: Combine some early support and some at death, which might be advantageous in terms of both family values and tax breaks.
- Don’t give it at all: This last option might seem harsh, but there are several ways that parents are approaching it. For example:
- High-profile, high-wealth individuals like Mark Zuckerberg and Bill Gates have decided to leave their fortunes to charity via The Giving Pledge.
- NBA legend Shaquille O’Neal has said he expects his children to get an education and earn their own money, not depend on him for inheritance.
- Some parents feel they should enjoy the full span of their own lives and let adult children sort out their own finances.
On a personal note, Huston said it’s difficult for him to envision not leaving an inheritance for the next generation, because of his own humble beginnings and the sacrifice it took to build what he has. However, he thinks that when parents do make an alternative decision, it’s most often because of a value system or a true belief that it’s in the best interest of the child.
In addition, Huston has seen intergenerational wealth transfers go poorly, with younger generations ill-equipped to manage large sums on their own. For this reason, he said one common approach is to split a lump sum into thirds. One third transfers upon death, and there is a system in place for getting the next third, and the next, either when a certain amount of time has passed — say five years — or when other criteria are met.
He also suggested that inheritors seriously consider staying with the existing family financial advisor, even if it might not be their first choice, because changing could mean “throwing away decades of relationship with your family.”
No matter what you choose, keep three things in mind.
Make a Plan
Making decisions during a time of grief is the worst possible scenario — and often comes with time pressures as well as emotional stress. Thinking through and writing down your plan is a profound act of love and care for your heirs. The National Institute on Aging offers resources to get you started.
Open the Lines of Communication Early, and Keep Them Open
One of the worst things you can do in money matters is to avoid talking about them. This can bring unwelcome surprises and undue stress.
Families should discuss inheritance plans all together, with an advisor present, if that’s helpful. Everyone should be able to ask questions and share perspectives about the values and rationale behind the decisions.
Huston said that a great time to do this is when children are in their early 40s and parents are in their early 70s. The conversation can and should include end-of-life care and insurance, as well as advanced healthcare directives. In this way, preferences and plans are out in the open when the time comes.
Build Financial Literacy
Like any other skill, financial literacy can be developed. You don’t get money savvy just by being around wealth or being the child of high earners, though. In fact, sometimes, it’s the opposite — affluence can shield you from understanding how money works.
At any age or stage of life, investing in your own and your kids’ personal finance knowledge will pay dividends. And it may keep you out of the 90% who struggle to maintain and grow their inheritance over generations.
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