There’s a lot of buzz going on right now about the 22-year old girl that recently called into nationally syndicated show, The Bert Show. The story goes that the young woman (Kim) received a college fund worth $90,000 from her grandparents upon entering college, all of which was to go towards college expenses.
But now the 22-year old college junior has a year left of school and her funds have been depleted. She squandered her money, apparently on a European spring break trip, nice clothes and the like. Ironically, when she called into The Bert Show, instead of being painfully embarrassed and mortified, she was mad. She told the hosts that her parents should have taught her how to budget a little more carefully. She went on to say that they never sat her down to have a serious talk about it.
We’re all probably thinking the same thing about Kim right now–that she’s spoiled, entitled, and beyond irresponsible. But, practically speaking, I have to place some of the onus for this financial debacle on Kim’s grandparents. After all, if you’re going to give a 19-year old $90K, you should also give that 19-year old a plan to go with it. It’s not enough to assume that a person of that age is going to be mature enough or have the budgeting experience to manage such a large sum of money.
Needless to say, this story would’ve had a much happier ending if there was a detailed plan in place. A plan is unequivocally the most important element when making a wealth transfer. It is the only way to way to protect your money and ensure that it will be used in the way that you wish.
Too Much Control or Right on Point?
Now, let’s look at a story at the opposite end of the spectrum. The New York Post ran a recent article about a wealthy Manhattan landlord named Maurice Laboz. Maurice, who died earlier this year, left $20 million to his two daughters — but they can collect only on his strict terms. According to the article, the Laboz girls — Marlena, 21, and Victoria, 17 — are set to inherit $10 million apiece when they turn 35. However, if they follow a few of their Dad’s rules they’ll be able to cash in on some of that money a little earlier. For example:
- Marlena will get $500,000 for marrying if her future husband signs a pre-nup disavowing himself of the money.
- She gets another $750,000 for graduating “from an accredited university” and writing “100 words or less describing what she intends to do with the funds.” The 100-word piece must be approved by trustees appointed by her dad to oversee the money.
- Both daughters are guaranteed an annual payout of three times the income listed on their tax return if they have gainful employment by 2020. Checks will be written every April 15.
Too controlling? While some might think so, personally I’d err on the side of ‘too controlling’ any day of the week when you’re talking about $20 million of my hard earned cash. If I’m going to leave that kind of money to my children, it’s not going to be for free. Certain goals will need to be met and rules will need to be followed. Handing over that much money without some stringent standards to meet and a plan in place will only spell trouble. It makes it way too easy for people to just spend their days hanging out and unmotivated to achieve much if they know that they are going to inherit a huge sum of money to live off for the rest of their lives.
Once Again, Warren Buffett Knows Best
We’ve taken a look at two ends of the spectrum- handing over money with zero control, and handing over money with tight control. But here’s an interesting fact: not everyone is going to leave their money- whether it’s a large amount or a little- to their heirs.
A 2014 U.S. Trust Wealth and Worth survey found that Baby Boomers are less likely than any other generation to believe it is important to leave an inheritance to their heirs. While 53 percent of Boomers feel it’s important to leave a financial inheritance, that number is 68 percent for those over the age of 69. According to Chris Heilmann, Chief Fiduciary Executive of U.S. Trust, the reason why is because a heavy percentage of the survey participants were first-generation wealthy and feel their children should earn their own money just like they did.
For the best example of this, look no further than my personal favorite, Warren Buffett. He is probably the most famous and richest proponent of this approach to inheritance. He is quoted as saying:
‘My family won’t receive huge amounts of my net worth. That doesn’t mean they’ll get nothing. My children have already received some money from me and Susie and will receive more. I still believe in the philosophy … that a very rich person should leave his kids enough to do anything but not enough to do nothing.’
Buffett even created the Giving Pledge which is a commitment by the world’s wealthiest to dedicate the majority of their wealth to philanthropy rather than family. Among those who have committed are household names like Richard Branson, Michael Bloomberg, Larry Ellison, and Bill & Melinda Gates, just to name a few.
There are two lessons here. The first lesson is that estate planning is critical. Once exclusively thought of as a way for rich people to create trusts to lessen their estate tax burden, there has been a change in the industry trend. The focus of estate planning has shifted from primarily finding tax relief to creating plans for wealth transfers. This includes who the money is going to be left to, when, and how it should be used. A whopping 70% of wealth transfers fail due to lack of a plan and familial miscommunications.
The second lesson is that early financial education is imperative in order to create fiscally responsible adults. People need to learn early on how to keep a budget, save, set goals and navigate through life’s unexpected circumstances. If you’re looking for financial direction, there are a lot of free online resources to get started. My digital advisory firm, Wela, offers a host of free tools and access to smart investing and financial planning advice anytime, anywhere- be it over the phone, via video, or in-person.
Before you decide to give away any money to family members or heirs, remember Kim’s story! Take all the steps necessary to protect your hard earned money and talk to a financial planner about best practices for transferring your wealth.