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How Much Should You Leave to Your Kids?

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How do you feel about legacy giving? Chances are, you see the issue differently from your own parents. We’re experiencing a generational change in views on inherited wealth.

Parents of today’s baby boomers, having lived through a World War and less prosperous times, were usually excellent savers. In their retirement years, their investment assets are a side-show to their guaranteed, defined-benefit pensions. But that model they hand down of stockpiling investments until death, at which time their children receive a large inheritance, is looking increasingly dated to the next generation.

It’s different for baby boomers: According to MarketWatch, “23% of pre-retirees would ideally like to spend all of their savings and let their children fend for themselves. In contrast, a mere 9% say they want to save as much money as possible to pass on to the next generation.”

Is that selfishness, or just common sense? How much will you leave to your kids? How much should you leave?

Many boomers have endured careers in a damaged economy. Others have lived inflated, debt-ridden lifestyles. Still others have spent heavily to educate and launch adult kids. All these factors have severely eroded the average boomer’s net worth. What wealth they have available for retirement will be targeted at essential living expenses, with little earmarked for legacy giving.

Entitlement

Those boomers with enough to leave substantial wealth behind, may direct it to charity instead of family: The majority of affluent boomers made their own money, and feel their kids are best off doing the same. But a few feel differently: Ink is spilled, fees are paid, and tax strategies are employed in an effort to maximize family wealth passed down to the next generation.

Why do people instinctively want to preserve a large legacy as they age? Some of it is probably natural self-preservation — keeping a rainy-day fund against an unknown lifespan. Some of it could be a subconscious desire to remain relevant to heirs later in life — easier to do when you’re net worth is substantial. Finally, some believe that legacy giving has the potential to transform death, by making a statement about who they were and what they valued.

But, if we aren’t careful, legacy giving plans may backfire. Sacrificing while raising your kids so they can enjoy a better life is a time-honored and natural parental role. But what is the point of denying yourself in retirement so that your grown children can enjoy an extravagant lifestyle, after you die? If they’re in the middle of careers, a large inheritance could be downright destructive, undermining their motivation in life. The sense of entitlement that comes from unearned wealth can stunt growth, subvert meaning, and contribute to depression and destructive behavior.

On the other hand, if children are much older, post career, they probably don’t need a large inheritance. Given today’s life spans, by the time you die, any children will likely be in their 60’s and 70’s, having already established a retirement lifestyle. How much difference will an inheritance make to their quality of life at that point? Sure a splurge or two might be nice. But, besides serving as worst-case insurance, and more investment dollars to play with, what’s a large bequest going to buy that is essential to happiness?

Expecting an Inheritance

On the other side of the equation, what if you are expecting an inheritance? How should you plan? In most cases, I wouldn’t factor an inheritance into my financial plan, other than perhaps as a hedge against other retirement variables. Unless your parents are so wealthy that they couldn’t possibly consume their assets in any reasonable scenario, it’s risky to base your lifestyle on the particulars of somebody else’s fate — their health, their expenses, their investments.

Unfortunately though, many working people do just that: According to MarketWatch, “nearly 20% are banking on an inheritance to completely or largely fund their retirements, while half say they expect to receive enough to provide them with some support in their later years.”

In my experience, the amount and timing of an inheritance are largely unpredictable. So, in my own planning, I’ve been willing to informally balance a potential inheritance against other unpredictable events, such as a need for extremely long-term care, so that I don’t have to insure against them all. But I would never count on an inheritance for essential retirement living expenses such as shelter, food, transportation, or health care.

Preserving an Inheritance

And what if you’ve already received an inheritance? How does that figure into your own legacy giving? Many people feel an obligation to preserve and pass on at least the principal they’ve inherited to future generations, rather than consuming it themselves. But, how do you implement that?

Unfortunately, passing on wealth you received is complicated by the impact of inflation over long time spans. You will have to give much more than you received, in nominal terms, if your goal is to preserve spending power for your heirs. Given the current investing environment, that could be difficult.

One approach, if you don’t intend to consume any of the income, is to put inherited money into a separate account with designated beneficiaries and simply pass on the entire ending balance. By contrast, if you mix the inherited assets with your own, then you would need to compute the inflated amount over your life expectancy and target that as your minimum legacy. This requires extra planning and attention, and still won’t be exact. But it may be comforting for some.

Buffett’s Way

How do the super-rich handle legacy giving? Philosophies differ, of course, but Warren Buffett created a Giving Pledge to convince more of the world’s super-wealthy to leave a majority of their fortunes to nonprofits, rather than to family. He advises the wealthy to leave children “enough money so that they would feel they could do anything, but not so much that they could do nothing.”

In other words, Buffett suggests leaving children enough to provide freedom and a safety cushion, without damaging their work ethic. The exact amounts are going to vary widely depending on individual family capabilities and lifestyle. For Buffett, the sum is “a few hundred thousand dollars.” Ultimately, the point is to support adult children in leading healthy lives and finding meaningful careers, not to set them up for a life of leisure.

(Obviously, this may not apply if you have minor-age children, children still in college, or a special-needs child or grandchild who requires care for life. In the latter case, a trust that fully funds their care and living expenses would be justified.)

Finding Balance

Misunderstandings come easily in family estate planning. The best way to ensure intelligent allocation and amicable distribution of an inheritance is regular, open communication about a family’s goals and needs. Meeting in person is best, but if geography or relationships are difficult, then annual written communication would be advisable.

Ultimately, as one of your last acts on earth, legacy giving is an intensely personal decision. Options could vary between leaving kids very little, and leaving them millions. And there is a balanced approach: Leave what you, yourself, inherited and, if needed, add enough to create an “emergency” fund, a family insurance policy that can see heirs through a spell of career or health difficulties. This ensures that the essential needs of future generations are met, while not so enriching children upon your death that they can inflate their lifestyles, or ditch meaningful careers.

Finally, if you’re in a position to give to the next generation, you might gift at least some of that money earlier in life. If there are clear needs now — education, housing, charity — why not meet them sooner than later? Why delay generosity? Ideally, you’ve raised your kids to manage money wisely. If you gift while you’re still alive, you can experience the joy it brings to family and others, you can see how they handle the responsibility, and you may even realize certain tax advantages. (As discussed in my post on estate planning you can gift up to $14,000 annually with no paperwork and no taxes, and much more than that at the small price of filing a perfunctory gift tax return.)

The bottom line is that leaving a modest inheritance to children can help to insure and free their future. But leaving too much, or giving at the wrong time, can distort and even harm their lives. On the other side, getting an inheritance is never a sure bet. Better not to anchor your retirement planning on a hypothetical bequest.

Managing a financial legacy is a difficult and personal process, without a perfect prescription. But one thing is certain: The current generation must and will do it differently than their parents.

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