Did you know an estimated $30 trillion dollars of wealth could be changing hands between Baby Boomer parents and their adult Millennial children in the next 15-30 years?1 That’s a lot of cash, property, investments, and assets moving around.
Some of this enormous wealth transfer has already started. There are figures say that approximately 10% of all the wealth in the US could be transferred between 2031 and 2045.
Perhaps you two are planning on transferring wealth to your kids soon or sometime down the road. The tricky part is how do you transfer wealth to your kids without them developing an overwhelming sense of entitlement? Surely you don’t want your kids to become demotivated and stop working hard once they find out you plan to bequeath your hard earned wealth to them.
Part 1: Talk to Your Kids
Discuss your financial status.
Money can be an uncomfortable topic at the dinner table, which is why some people avoid talking about it as much as possible. When it comes to your family, however, it can really help for all of you to be on the same page.
Don’t feel intimidated about discussing your finances. After all, you have full control over how much or how little detail you want to reveal. And it helps to decide on which specifics you want to disclose before sitting down to talk with your kids. For example, you may not want to get into the nitty-gritty of your exact salary or how much cash you have sitting in the bank, but it’s helpful to talk to your kids about the general health of your finances.
Studies have shown that adult children typically underestimate how much their parents have by $100,000.2 Perhaps you prefer to have that much ambiguity, perhaps not. While you consider just how much detail you want to reveal, be prepared that your kids are likely to have a lot of questions. Think about your answers to the questions below so you’re not caught off guard if they come up.
Do you have any credit card debt?
Is your mortgage paid off? If not, when?
How much do you have in your retirement funds?
Do you have a will?
What are your major assets and how much are they worth?
How much do you have saved for retirement?
What type of inheritance could I get?
When and how would I get my inheritance?
How much would each person in the family receive?
Did you get any inheritance from your parents?
Find out which of your assets are most important to your children.
Transferring wealth isn’t just about cash. You may have multiple properties, vehicles, a boat, antiques, collectibles, jewelry, investments, or other valuables that you want to pass on to your children.
Even if you know their interests really well, it’s still beneficial to have a conversation with your kids about which of your assets they are most interested in. Certain assets may have more sentimental value to one child versus another that you weren’t aware of, or one of your children may not want an equal share of one particular asset in order to have more of another. The more you are aware of which assets each of your children is interested in, the easier it will be to gain their support and transfer wealth in a meaningful way.
Share your experiences and encourage them to build their own wealth.
Chances are you’ve learned a lot about wealth management, building assets, and investing over the years, if you’re planning to transfer wealth to your kids. Pass along your knowledge and get them inspired! If you want your kids to stay motivated both before and after you transfer wealth to them, it’s crucial you explain how you were able to get to where you are today.
If you try to downplay all of your efforts and the sacrifices you made to accumulate all of your assets, your kids could misinterpret that to mean it was easy for you. And the problem with them thinking it was easy for you is they could kick back and expect riches to come to them “for free” without having to work hard themselves.
Also help them appreciate the sense of fulfillment that comes with achieving financial goals by telling them stories of how you felt when you bought your first house, paid off a loan, maxed out your 401k for the first time, and got a raise at work. Stories bring people together and the older you kids get the more they will appreciate your narratives as well.
Emphasize your financial situation could change. If you’re comfortable telling your kids how much they could inherit someday, make sure to remind them there are no guarantees. We simply do not know what could happen tomorrow and you could find yourself facing an emergency situation down the road that negatively impacts your financial situation.
Perhaps you may need a lot of expensive medical treatments, a family crisis may surface, or a natural disaster could cause significant property damage to your home. Alternatively, your financial situation could materially improve as well, thereby enabling you to transfer wealth to your kids earlier, or in larger amounts than you anticipated. Perhaps you decide to downsize to a smaller home in a cheaper area, or you make some profitable investment decisions.
The more your children recognize and appreciate that your financial situation can change, which is likely to impact them as a result, the less likely they are to become demotivated or unappreciative.
Clarify what documents you have in place.
If you plan to transfer wealth to your kids, it’s important to have a will, and consider talking to a tax advisor or attorney if you have a lot of different assets to bequeath. You may also want to have a trust, life insurance policy, and an estate administrator.
After you get your affairs in order, have a conversation with your kids about what type of documents you have in place, clarify where they are kept, and pass along any important contact information, keys, and passcodes if necessary. This can give everyone the peace of mind in knowing that if something unexpectedly should happen to you, your kids would know where to go and whom to contact.
Be as clear as possible with what you bequeath.
Every family has its own challenges and circumstances, so this may not always be possible or how you choose to divvy things up. If there are any inequalities, its important to explain why you came to your decision on specific allocations.
Have a private conversation with each of your kids if the reasoning is a sensitive topic. Without a clear explanation, jealousy and resentment are likely to result, which can lead to one or more of your kids feeling demotivated and bitter. The last thing you want is for family resentment because of insufficient communication or strong emotions.
It’s also important to decide on specific percentages and distributions yourself in advance, instead of leaving that responsibility to one of your kids. Even if you designate your oldest child as the person responsible to divvy things up based on your wishes, there is no guarantee they will allocate your assets the way you intended. Don’t leave the distribution of your wealth to chance.
Consider transferring wealth in phases.
If you have concerns over whether or not one or all of your children could be reckless with their inheritance, you may want to consider putting your assets in a trust with a phased distribution schedule that you have defined and documented. Many attorneys who specialize in estate planning recommend this method of giving.3 This would allow you to distribute assets in multiple phases based on age or other circumstances.
Take advantage of tax rules and exemptions.
In 2015, the federal estate tax exemption is $5.43 million per person, which is $90,000 higher than 2014. So married couples can take advantage of $10.86 million in tax exemptions which is a significant savings to take advantage of considering the highest federate estate tax rate is 40%.
The 2015 federal annual exclusion for gifts is unchanged at $14,000. However, there is no limit on how many people you can gift $14,000. And couples can each give $14,000 per individual. So each child could receive $28,000 from his/her parents combined.4
You may also want to consider taking advantage of the step-up function with your assets. The basic idea is that when you pass away and an asset is transferred to an heir, the cost basis of the asset is based on the current value, not what you originally paid for it. This can reduce the amount of capital gains tax your children have to pay.5 An easy example to understand step-up in basis is real estate. If you purchased your house many decades ago for $100,000 and it’s worth $1,000,000 when you pass, the cost basis that becomes $1,000,000. So if they sell the house a later for $1,500,000 their capital gains would be based on $500,000 instead of $1,400,000.
Teach your kids about money and investing as early as possible.
The sooner you can get your children interested in building wealth, the better. Teach them about what you’ve learned about managing your own money over the years. And get them actively involved using these five tips to get your kids investing.
Since you are sharing your financial status with your kids in preparation to transfer wealth, you might have a conversation to find out where they stand financially at the same time. Encourage them to get proactive with investing and grow their own wealth even if they are already adults. Strike up some engaging conversations about how young people should save for retirement and how to accumulate assets like the rich.
Part 2: Continue Growing Your Wealth
Having the means to transfer wealth to your kids is an admirable achievement. The more you talk to your family about your financial situation and how you were able to grow your assets, the more likely they will be inspired to do the same. Telling your kids you plan to transfer wealth to them someday doesn’t mean they are suddenly going to feel entitled and demotivated to work hard for themselves.
Help your kids appreciate what they already have, and encourage them to seize their own opportunities to build their own wealth. Keep investing to build your wealth and explore offerings in the motif catalog today that you believe could help you build a portfolio that meets your unique needs.