Parents need to find the right balance and instill a strong work ethic that sets inheritors up for lasting success.kate_sept2004/iStockPhoto / Getty Images
Early inheritance can allow parents to see their hard-earned money make a difference in their children’s lives, but careful planning is required to maximize the benefits and avoid unintended consequences.
Just as wealth advisors personalize their guidance and financial planning according to each client’s needs, they should support parents who are gifting based on each child’s circumstances. Not all gifts are created equal, even if the dollar amounts are identical. The type of gift, its timing and how it’s given can lead to vastly different outcomes.
For example, giving large cash gifts to children who lack financial discipline may lead to more harm than good by exacerbating existing spending problems. A child’s attitude toward money, spending habits, degree of financial independence, stage of life and personality are all important when considering how – and how much – to give. Parents need to find the right balance and instill a strong work ethic that sets inheritors up for lasting success.
Funding education expenses so children graduate debt-free is one of the best ways to set them on a path toward long-term independence. Similarly, contributing to a down payment for a home or to child care costs can offer substantial financial relief when needed most.
Giving small amounts over time allows recipients to adjust responsibly and gives parents insight into how well their children manage newfound wealth before committing larger sums.
Depending on the circumstances, structures such as annuities or trusts can provide both security for recipients and peace of mind for givers by setting clear guidelines and boundaries around how the inheritance should be used.
Parents may also want to consider protecting gifts from marital breakdown. For instance, instead of an outright cash gift, they may decide to structure a down payment as a loan with clauses that allow parents to recall the loan on demand.
Most important, givers should prioritize their own retirement and financial security before gifting large sums. Advisors must contextualize potential gifts within an overall retirement plan. Generous giving shouldn’t jeopardize retirement security or create future dependence on their children.
Giving fairly
Misunderstandings or tensions between family members because of perceived unfairness with inheritances are common. While giving fairly doesn’t always mean giving equally, it’s generally best to distribute gifts as equally as possible to avoid conflicts.
In cases in which one child needs more assistance than others, perhaps because of health issues or other factors, it’s important to inform all children of the decision-making process to prevent misunderstandings and resentment.
Because family members rarely understand all the details of their family’s overall financial situation, advisors are positioned uniquely to provide objective and holistic counsel to support families as they navigate these challenging conversations.
Coaching early inheritors
While receiving a large inheritance can lead to excessive spending, some people can be paralyzed by the sudden influx of wealth. They may struggle with accepting the new wealth as truly theirs and hesitate to make changes that could have a positive impact on their lives, such as taking time off work, upgrading their standard of living or pursuing their passions.
Advisors can help unwind decades-old attitudes about money, whether rooted in scarcity or abundance mindsets, and guide clients to use their inheritance constructively.
As a change in mindset is often gradual, recommending incremental steps – such as a home upgrade – can break down old habits and preconceived notions. Over time, these small shifts can make a long-term difference in a client’s quality of life.
By fostering an environment in which clients feel comfortable discussing their circumstances, challenges and emotions openly, advisors can play a pivotal role in transforming early inheritances into opportunities for growth and long-term wealth that endures for generations.
Alexandra Horwood is portfolio manager and investment advisor with Alexandra Horwood and Partners at Richardson Wealth Ltd. in Toronto.