A recent article written for the online magazine, The Atlantic, discussed the issue of inheritance, and specifically whether there exists a magic number that represents an inheritance that is too large. This question has become relevant for many reasons, one being that some wealthy parents are concerned that after a certain point, money passed down will be damaging to the next generation, removing the incentive to be productive contributors to society.
This is not a new question. King Solomon in the Old Testament, clearly pondered the same question during a particularly dark time in his life:
I hated all the things I had toiled for under the sun, because I must leave them to the one who comes after me. And who knows whether that person will be wise or foolish? Yet they will have control over all the fruit of my toil into which I have poured my effort and skill under the sun. This too is meaningless. So my heart began to despair over all my toilsome labor under the sun. For a person may labor with wisdom, knowledge and skill, and then they must leave all they own to another who has not toiled for it. This too is meaningless and a great misfortune.
ECCLESIASTES 2:18-21 NIV
The question is, how big of a concern should this be given the fact that most people won’t receive vast fortunes from their parents? In fact, research by the Federal Reserve indicates that 85% of inheritances between 1995 and 2016 were less than $250,000 and most were less than $50,000.
From my personal life and professional experience, I have formed this opinion: sudden money will bring out a recipient’s best or worst financial behaviors to the degree that they have been prepared for it, regardless of the amount. This is not to say that mistakes with inherited money are necessarily a bad thing. Speaking for myself, the lessons that I have learned through failure are some of my more life-changing ones, and I wouldn’t trade the failures for successes without the lessons.
For those inheriting less than say, $50,000 – the impact of learning through failure isn’t as financially devastating as burning through $5 Million. Older parents who are concerned about their adult child’s ability to manage up to perhaps a $150,000 inheritance may want to consider these less elaborate (and less costly) options than leaving their assets in trusts or other complex arrangements:
•Leave it to them unfettered and simply let them do their best with it and hopefully learn a valuable lesson in the process. Losing $50,000 for buying an RV rather than saving it for retirement may be a painful lesson, but one they can likely recover from.
•Consider leaving the money to a grandchild’s education account such as a 529 Plan, instead of outright to the adult child-parent.
•If the inheritance is paid through an insurance policy, discuss the policy’s settlement options (how the death benefits are paid to a beneficiary) with your insurance agent. One option may be the payment of a monthly amount spread out over a number of years which cannot be altered by the beneficiary.
What about the small percentage of significantly larger inheritances? Should families be concerned about how the sudden impact of substantial wealth will affect those who inherit? My response is a resounding YES, not only to preserve the wealth left to these beneficiaries (The Sudden Money Institute, a think tank specializing in life transitions such as inheritances, claims that 90% of inherited wealth disappears by the third generation), but also because inheriting sudden wealth can be difficult emotionally as well.
Trusts can be useful tools for preparing heirs for the wealth they stand to inherit. For over two centuries wealthy Americans have used trusts to preserve family wealth or family-owned business enterprises, control heirs’ behavior from the grave, or provide financial tutelage until heirs demonstrate the ability to responsibly handle their wealth. For many, the idea of a trust for heirs conjures images of spoiled rich kids living off Mom and Dad’s trust fund. Others conceive of trusts as prearranged marriages between a cold, detached financial institution and a person’s rightful inheritance. However, Trustees - those who might control the purse-strings for these wealthy heirs for decades - are required by law to act in the best interest of these heirs. A good trustee will assume the roles of surrogate and mentor with the beneficiaries under his care and like a good parent, will sometimes allow the beneficiary to fail small in order to learn valuable lessons for when the beneficiary may have responsibility for a much larger fortune later on. Argent Trust treats its role of trustee as a solemn vow – a vow to act true to the intentions of the one establishing the trust, and a vow to act at all times in the best interests of those to whom the trust belongs.
However, no trust or estate plan can instill character regardless of the sophistication of the plan. A healthy work ethic, compassion, integrity, loyalty, fidelity… these are ultimately behavioral choices we all must make, no matter how wealthy we may become. Perhaps this was Solomon’s true lament.
David W. Russell, CFP®, CSA® is vice president and trust officer with Argent Trust in Ridgeland. He is a Certified Financial Planner and a Certified Senior Advisor with more than 35 years’ experience advising individuals, families, and organizations. He is also author of the book, “What You Need to Know: The Adult Child’s Guide to Becoming and Effective Financial Caregiver” and editor of Wealth and Honor (www.wealthandhonor.com) an online blog and educational resource for families facing the financial challenges of age transitions.