AS parents, we want to give our kids better lives and opportunities than we did in our time. But is there such a thing as giving your children too much?
It’s a norm these days for loving and well-to-do parents to offer to help purchase their child’s first car. Some parents may even go as far as to bequeath a piece of property for their children – something which many young professionals on their current pay cheque are struggling to own!
This article is not to argue about why parents shouldn’t pass on their “assets” to their offsprings, but rather how it can be done more effectively so as not to cause conflict, discontent and disagreement if the assets are to be distributed too soon and/or too much.
Paris Hilton was notorious for her extravagant spending, drug abuse, and partying days, resulting in drunk-driving charges and the need for rehab.
Meanwhile Tori Spelling, daughter of successful film and TV producer Aaron Spelling, made a habit out of her infamously extravagant spending, prompting her late father to modify her inheritance to a mere US$800,000 out of a US$500mil legacy. To this day, Spelling struggles with debts, while relying on her mother to help clear her rent and other bills.
Closer to home, a client of mine was lucky enough to amass a good mix of properties throughout the years. He now wishes to pass on these assets to his two surviving children. However to his dismay and disappointment, both children ended up arguing about who is getting which property. And the cause of the upset? Each of the properties is different in value.
Thus, it warrants us parents asking ourselves, if our well-meant actions could lead to unexpected or unwelcome results?
What’s the point of giving our accumulated estates away after all that hard work, some may ask? In reality, there are several ways that a large inheritance can be damaging to our kids:
The habit of consuming: When children grow up knowing that a large inheritance awaits them, they tend to build an appetite for consumption, which is a rabbit hole leading to a pathway of materialism, debt, and unfulfillment.
Children won’t see the need to build good financial habits if their parents have made it known that they will be always there to settle the bills and bail them out with money.
Let’s take the decision of buying a car. After working a couple of years, your kid is likely earning around RM3,500. While the recommended monthly installment of a car should be around 10% of your gross monthly income, if your child knows he will one day have an inheritance to fall back on, he may make an unwise decision of purchasing a luxurious car that takes up almost half his salary (not to mention, a depreciating asset).
This decision may seem harmless at first as you’re able to support him. But add decisions like these up and combine it with an ever-growing standard of living, your kid will end up in the red sooner than you think.
The value of money is lost: The inheritance that you hand down to your kids is a result of decades of gruelling work, calculated saving and careful financial management. All these are good money habits that have led you to where you are today.
When your children inherit this money early on without having to stand on their own two feet, they lose the appreciation for the effort that it took to earn this money, and eventually lose touch with reality. Not understanding the value of money doesn’t only leave your children vulnerable to financial crises in the future, but it also builds adults who aren’t as street smart and financially literate as the next person.
Raking up debt: When children grow up in extravagance when they are young, they see no real need to be careful with their money, much less invest.
They instead develop poor habits such as spending with money that they don’t earn, and having a standard of living that is beyond their means. As a result, they go on living this way until one day their inheritance is no longer able to mitigate the difference between their actual paycheque and their extravagant lifestyle, thus accumulating debt.
So, what should parents do when faced with such a dilemma?
In this situation, there is a balance that needs to be struck between giving your children enough to be comfortable, and not giving them too much that they lack the desire to accomplish anything of their own.
One way that you can do this effectively is by bequeathing your inheritance to your children in the form of trusts. There are several ways that trusts can operate:
Income and principal are distributed at the discretion of the trustee.
Income is distributed annually, while the principal will be distributed upon the heir attaining a specific age or fulfilling a certain condition e.g. your daughter receives 50% of the principal when she graduates from university and the remainder when her children are ready to start college.
One-third (or your specified percentage) of principal is distributed when the heir reaches 25 years of age, another one-third at 30 years, and the balance at age 35.
Parents can utilise methods 2 & 3 to distribute their inheritance while ensuring that certain values are kept and practised by their children. Below are some examples of principal distribution via trusts commonly used by well-advised parents around the world:
Achievement-oriented: Each child shall receive an annual distribution equal to his or her earned income reported for income tax purposes in the prior year.
Philanthropy-oriented: Each child shall receive an annual distribution equal to double the total charitable contributions reported in his or her income tax return for the previous year.
Growth-oriented: Each child shall receive the following distribution upon earning the following degrees: (1) Bachelor’s degree, RM50,000; (2) Master’s degree, RM100,000; (3) Doctorate, RM200,000.
With a little bit of thought and creativity, you too can craft a trust that lets you sleep at night knowing that your children’s comfort is seen to, while emphasising the values that you and your spouse hold dearly.
Bringing it all in
Many parents think that giving their children everything they have is an act of love, without realising the damaging long-term outcomes that money and comfort may cause. Bequeath to them instead the knowledge to achieve their own wealth, and you’ll set them up for life.
In fact, you don’t necessarily need to bequeath 100% of your estate to your children. You can always choose to hand them only a portion of your wealth while donating the rest to a worthy cause, such as aid and education for the unfortunate, women’s development charities, or environmental causes.
This can be another extension of yourself to express your values and beliefs to your children, while generously contributing to the betterment of society.
Take for example, billionaires like Warren Buffett, Bill Gates and Li Ka-shing who do not believe in bequeathing all their wealth to their children, and instead, plan to donate a significant portion of their wealth to charitable organisations.
Meanwhile, singer-songwriter Elton John follows Buffett’s philosophy on inheritance – “leaving just enough for your children to do anything, but not enough for them to do nothing”.
He plans to leave his children enough to be able to afford a house, car and other basic needs, and nothing else. Gates has announced he is leaving US$10mil to each of his children, a miniscule portion of his US$80bil estate, which will be going mostly to charity.
Remember, life is not about reaching the finish line as fast as you can, it is about the journey of getting there. As parents, we should not deny them this journey of growth and fulfilment – a journey that they will embark on when pushed beyond the comfort of money.
At the end of the day, the best inheritance you can give your children are an excellent set values, infallible work ethic and good money habits that will carry them through the thick and thin of this journey.
As the old saying goes, “Wisdom with an inheritance is good, but wisdom without an inheritance is better than inheritance without wisdom”.
Yap Ming Hui (email@example.com) is thrilled that his mission to empower every Malaysian with a roadmap to financial freedom has finally come to fruition with the release of a free DIY roadmap to financial freedom tool on the iWealth mobile app. The views expressed here are the writer’s own.
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