Tip:
Highlight text to annotate it
X
I'm Rick Kahler. Thanks for joining me. I've never seen money passed from one generation
to another in a manner that actually benefited the recipient. Quite a statement. When a psychologist
said this to me several years ago, I was dumbfounded. Many parents scrimp, save, and sacrifice so
they can leave something to the kids with the intention of doing them good. It's hard
to accept that inheritances may actually do harm instead. Most of us have money scripts
that don't support this idea. Typically, I used to hold several money scripts
around inheritances. One was that leaving money to your children is a loving thing to
do. Another was that parents should always leave their money to their children. A third
was that anyone who received an inheritance would invest it wisely, using only the earnings
to improve their lives. Today I know those money scripts were not
universal truths. I have more understanding of the problems involved in giving money away
in a manner that is beneficial to the receiver. It isn't as easy as I once thought.
Many parents envision inheritances for their kids as seed money that will be used for the
health, education, and welfare of their offspring for many generations. Research shows that
is rarely the case; instead, inherited wealth does not last long. Missy Sullivan summarizes
some of the research in Lost Inheritances, a Wall Street Journal article published online
March 7, 2013. According to this article, 70 percent of those who receive an inheritance
of any size spend it all in their lifetimes. For the 30 percent that do have something
left to pass on, 70 percent of their kids also blow everything they get. That means
by the end of the third generation, 90% of the money originally passed down is gone.
While it's easy to understand how an inheritance of $10,000 may evaporate, it's difficult to
understand that inheritances in the hundreds of millions evaporate just as quickly. How
is that possible? Is the average American just incompetent at managing money?
According to Sullivan, a study done by the Williams Group found that poor investment
decisions were not the culprit. About 60 percent of large inheritances disappeared because
of a lack of trust and communication between family members. Another 25 percent of the
time, money evaporated because the parents failed to prepare the next generation to handle
their impending inheritance. Poor investment advice and high fees were the cause in less
than 15% of cases. If more high net worth parents knew that only
10% of their hard-earned estates would be around at the end of their grandchildren's
lives, I wonder if they might do a few things differently.
One option would be to address the two biggest issues; lack of communication and preparation
for heirs head-on during their lives. Parents wanting their money to benefit their kids
could engage the services of a financial therapist who could help the family address their communication
and trust issues long before they pass on their wealth. Preparing their children to
manage wealth and use it wisely would be the best way to increase the odds of making an
inheritance a blessing rather than a burden. Another option would be to secure their own
retirement, then forget all the scrimping and saving and just have fun blowing the money
on themselves. Still another option would be to give their
wealth to worthy causes during their lifetimes or upon their deaths. This would leave the
kids to make their money by ingenuity, hard work, wise money management, frugality, and
a little bit of luck. The same way, in fact, their parents did.