You have the money, but should you plan to give it all — or any of it — to your children when you die
The wealth transfer from one generation to the next is expected to remain part of the financial conversation for years to come, especially if a landmark 2006 survey that said Canadian Baby Boomers stand to inherit about $1-trillion during the next 20 years, holds up.
It has been nearly a decade since that Decima Research report came out, but there's little doubt much of the next generation is still hoping to cash in on the inheritance boom. Indeed, a recent poll done for HomEquity Bank found 35% of Canadians expect a bequest from their parents.
They could be in for a surprise. This month musician Sting made headlines with his pronouncement he won't be leaving any of his estate, worth an estimated US$300-million, to his six children because he didn't want it be an “albatross” around their necks.
Warren Buffett has already earmarked 99% of his gargantuan wealth to eventually go to charity, rather than his children, saying “I want to give my kids just enough so that they would feel that they could do anything, but not so much that they would feel like doing nothing.” Michael Bloomberg has promised the same for “nearly all of my net worth,” as has Bill Gates and Home Depot co-founder Bernard Marcus. Another rock star, Kiss's Gene Simmons, said he wants his kids to be “taken care of” just comfortably enough that they're still “forced to get up out of bed, and go out and work and make their own way.”
One billionaire Canadian philanthropist, who didn't want to give his name, said he has probably left his children too much at this point. “I've probably [messed up] their lives forever,” he said.
It's a sentiment shared by many parents who don't want to see their children spoiled by the money.
“I do feel bad for his kids — $300-million, six kids and they are not going to get anything,” Yvonne Ziomecki, senior vice-president of HomEquity Bank, said of Sting's declaration. “It does seem a little tough.”
Ms. Ziomecki said the 35% of people expecting an inheritance was actually lower than the group had been expecting when it commissioned the poll, though it was the first time that HomEquity had asked the question. One thing the study found was that as people got through their 40s and their 50s, they became more financially independent and didn't care about whether their parents left them money.
“They have their own kids, careers and have planned things out, and they start to realize they don't have to rely on their inheritance,” Ms. Ziomecki said, adding that perhaps the question is whether these people would have had the same career and success had they just been handed money.
In fact the survey showed that as people got older they said they would trade off receiving money from their folks, in the hopes their parents live longer: 94% of respondents said would give up half their inheritance if it meant improving their parents' lifestyle.
Still, she said it's hard not to be tempted to help children today especially when it comes to major goals such as a buying a house, in which a 20% down payment — a percentage that allows buyers to avoid costly mortgage insurance — is so hard to come by.
The worry some parents have is they will be “wrecking” the kids by handing them so much early, said Cindy Crean, managing director of private client at Sun Life Global Investments (Canada) Inc. “The fear is they will cause the kids to lose some ambition and the will to make money,” she said.
Ms. Crean said parents may disagree about how much to leave the children and she suggests people need to keep an open mind about when and how much to leave. “There can be emergencies where they need the money, and it's a shame if it's left all to charity and or it's all tied up and they have a medical emergency,” she said.
She said the first fundamental question is whether parents want to make sacrifices in their own lifestyle so their children will get more. “I know people who live very frugally and they could be enjoying their lives more, taking more trips or driving that car,” she said. “But the problem is some people just never learn to spend money. But you have to wonder what happens when the money gets in the hands of their kids — will they treat money with the same respect”
In some cultures it's not even an option because the law dictates you must be leave money to your children.
John Davis, a professor at Harvard School, notes than under Sharia law and in countries whose laws are based on the Napoleonic code, the state has a say in how an estate is distributed.
“In most countries around the world, inheritance, how you divide up your estate is prescribed,” said Mr. Davis. “It's only in the Anglo-Saxon world based on English common law where you are given complete discretion to give it to your children or give it to the cats.”
There are no countries he knows of that dictate you must give money to children while you are alive, other than providing them with necessities as minors. But the subject is interesting enough that every year he asks the adult students in his executive MBA class whether they think parents, while still alive, should give money to adult children; about 75% are consistently against it.
“Mostly people just believe their kids should make it on their own,” said Mr. Davis. “The argument [against it] is ‘You're going to give me an inheritance, give it to me at a time when I can use it for something to boost my life.' You can mis-allocate money, giving it too late.”
Tom Sorge, a Calgary-based family wealth coach and certified financial planner, said many people leave money based solely on tax considerations when they should take into account broader issues.
“A great line is ‘It's not how much you leave but how you leave it.' More importantly you have to prepare your heirs,” said Mr. Sorge. “Successful families set up their heirs from a very young age.”
He believes in a concept he calls the “Family Bank” which is set up as so children can apply for money or a loan. “You can set it up notionally and build rules that say things like ‘You want to start a business, you have to a have a business plan, some education in the area in the area you want to get involved in',” he said. Structures can be created so you can even have a board with outsiders who vet decisions about disbursements of the inheritance.
Another concept is trial balloons. “You give them a little bit of money and see what they do with it,” said Mr. Sorge.
Many of the rules about giving money hold true as much for the $100-million estate as the $1-million estate, said Mr. Sorge. “Everybody needs to talk about wealth and how it's going to be given out. You don't want any surprises — that's where you get more problems.”