Spotlight on Finance
By Frances O’Rourke, Senior Vice President, Key Private Bank
Receiving an inheritance can be and often is an unexpected windfall, and it can change lives—for better . . . and worse. That is why it is important to share your values and intentions with your loved ones when you are considering gifting them a portion of your estate.
Unfortunately, most heirs are not prepared to manage their inheritance. A study conducted by Ohio State’s Center for Human Resource Research for the U.S. Bureau of Labor Statistics suggests that adults who receive an inheritance save only about half of it, while spending, donating, or losing the rest. In fact, according to the Williams Group, a wealth consultancy firm, 70 percent of wealthy families lose their wealth by the second generation.
One of the bigger problems with inheritance is that people don’t talk about it. That’s a big mistake. The sooner you talk about money and transferring wealth with your heirs, and the more open your conversation with them is, the quicker and better you can inform them of your intentions. This is good for you because it ensures your wishes are understood and your values are modeled. And it is good for your heirs because it allows them to become part of your wealth planning process, introduces them to your financial advisors, and encourages them to develop a financial plan of their own.
Financially prepare your children for the future
Sharing your values and intentions with your heirs is important. However, equally important is teaching your heirs to understand the responsibilities that come with receiving an inheritance. This is best accomplished by raising financially literate children. Here are some tips:
- Start young. Teach children the value of money by giving them three containers for their money: one for short-term spending (candy, soda, fun stuff), another for long-term savings (for electronics, car, college) and the last one for charitable giving. This is a great way to teach basic budgeting skills. And if you want to teach the children about values, showing them how to give to charity is a great first step.
- Continue teaching. As children get older, teach them more responsibility by giving them more opportunities to earn, handle and save money. Chores and jobs are the perfect opportunity for pre-teens and teenagers alike to practice what they have learned as children, which is to balance spending with saving and giving.
- Teach budgeting. Have your kids purchase their own school clothes or plan their next birthday party. Such responsibilities help children learn the importance of budgeting and how to properly use funds for different activities. And keep this in mind: they will make mistakes—not enough money left to spend or not enough put into the “saving” container. But this is how they learn, and the idea is to help them experience money lessons at a young age, as opposed to trying to change bad money management behaviors when they are older.
- Expand boundaries. As your kids enter their college years, have them share responsibility in managing finances like tuition, room and board, books and entertainment. It will be as valuable as any course of study. Also, having them contribute to tuition payments and expenses will make their education more important and valuable to them. Part-time jobs, work-study programs and paid internships are all great opportunities to earn and learn while in college.
There is no substitute for financial education. Don’t let the subject be taboo in your household. And the earlier you start the better, because your inheritance intentions won’t be respected if the value of your money isn’t.
Pass along financial and family values
Over the next 30 years, America will experience the greatest transfer of wealth in its history. More than $6 trillion will be passed from one generation to the next. Considering that 70 percent of the time, family assets are lost from one generation to the next, this is disconcerting. However, even more alarming is that all assets are gone 90 percent of the time by the third generation.
If current statistical models hold true, this great transfer of wealth will eventually result in an equally great loss of wealth. It doesn’t have to. Financial literacy has a lot to do with this, but so too does the way you communicate with and raise your children. Lead by example:
- Give with meaning or purpose. When you give a family member a check for their birthday, discuss how they plan to spend it. Take this opportunity to discuss saving and spending.
- Help build independence. Encourage children and young adults to budget their money. Demand that they earn and save. And teach them about delayed gratification by setting up savings for the long term.
- Talk about investing. Guide and allow children to make investment decisions. Teach them the power of compounding growth by agreeing to match some of the returns, as well as the opportunity cost of robbing a nest egg.
- Include them in the financial conversation. Talk together about the household budget, family vacations, gifts and necessities.
- Share values. Discuss family stories and life lessons, using them as the cornerstone for planning.
- An inheritance is a gift and blessing to your family. With proper discussions and modeling of values you can help them extend this same gift to future generations. A financial planner can help you, especially if you have a hard time getting the conversation started.
Fran O’Rourke is senior vice president and market manager, Key Private Bank, for Key’s Capital Region. She may be reached at either 518-257-8733 or [email protected] This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Please consult with legal, tax and/or financial advisors. KeyBank does not provide legal advice. ©2016 KeyCorp. KeyBank is Member FDIC.
Understanding and creating an ethical will
If you are worried your children or family may not see eye-to-eye with how their inheritance of your money and assets will be handled, you might want to consider drafting an ethical will. An ethical will is a document used to pass along your ethical values to the next generation. You may have already created a will or an estate plan, but this varies from an ethical will.
A will and estate plan define the distribution of your assets. They don’t necessarily describe personal values or wisdom learned over one’s lifetime. However, through the process of creating an ethical will, these lessons about mistakes to be avoided after decades of trial and error can be handed down to heirs so that they have a chance to do things different and in line with your wishes.
Ethical wills, which are not legally binding documents, allow you to offer more input than the typical will or estate plan. The writer has the opportunity to share things that often go unsaid about their wishes, values and even finances. Or, as is commonly said about ethical wills, they are meant to transfer values, not valuables.
There is no standard form for an ethical will. It can be a letter, recording or video, but they often can provide the following:
- Sharing of values and ideals
- Sharing of successes, failures and the lessons learned
- Traditions you would like to see carried on in your family
- A way to reunite a family during difficult times
- Clarity when there are differences of opinion
- Encouraging reflection about how we are living our lives
In an ideal world, your children would model your values and behaviors. But your children are growing up in a world that is much different than the world you grew up and found success in. An ethical will is one way to help ensure that your values and wishes are more likely to be carried out when your family receives their inheritance.