Inheritance power move: leaving money to charity so you don’t spoil the kids

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Does the promise of a hefty inheritance tomorrow make kids unmotivated and spoiled today?

Some wealthy parents are tempted to leave the bulk of their estate to charity, to ensure their children develop their own talents and skills. But advisors recommend careful consideration before taking that route.

“You hear a lot about these tech entrepreneurs who are adamant about not leaving their kids too much,” says Martha Simmons, chief operating officer at Forthlane Partners, a multi-family office based in Toronto. “They worked hard to make the money and they don’t want their kids to be spoiled.

“I think some of that is fear of wealth, that may not be fully well-formed or founded. Some of the work that we do with families is to unpack that and help them understand that just having wealth doesn’t mean that your kids will be lazy or entitled.”

Simmons says she has conversations with clients who say they want to leave $5 million to their children and the rest goes to charity. At the same time, however, she says to them, “‘Tell me what you want for your kids’ and they say, ‘I want them to have every choice there is in the world.’”

But $5 million isn’t necessarily going to allow them to follow their passions, says Simmons. The parents might change their minds as they realize how expensive life is, and as they watch their kids go to school, be diligent and have aspirations for hard-working lives.

She urges wealthy families to reassess their estates every five years as their opinions change and they see their children develop.

Be honest with your children

She also urges families to be upfront with the next generation about what’s in the will, especially if the bulk of the estate is going to go to charity or there is some uneven distribution of the estate among the heirs.

“If you’re [restricting your children’s inheritance] because you want children to make their lives on their own and feel the success of accomplishments on their own, then you want teeth in that lesson. If they find out on your death that you’ve done that, you’ve lost the education opportunity.”

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Family offices can help by providing infrastructure and education to relieve the fears of parents who are concerned about spoiling kids with windfall inheritances. Trusts that control the dispensation of funds can prevent the money from going to their heirs all at once, says Simmons.

In addition, discussing charitable giving with your children can start from the earliest age and will allow continued discussion of the family’s philanthropic mission through the generations.

“We work one-on-one with families, talk through what’s important to them, what kind of change they want to make in the world, how much that’s going to cost, how much to leave to each child.”

Giving money now, not waiting for a will

Kelly Demo and Andrew McQuiston, senior wealth advisors and portfolio managers at West Oak Family Office in Calgary, say they are seeing a trend: parents giving large sums to their children while they are still alive rather than leaving it all in a will.

“They have so much money they want to watch their kids use it and see how their kids use it,” says Demo. “Kids have to be more in-the-know than they ever have been, because parents are handing them millions of dollars and saying, ‘Figure it out.’”

The trend puts more responsibility on young adults, but it also introduces them to the importance of sound advice and what family offices can provide in terms of resources, say McQuiston and Demo.

A gift can present opportunities for financial literacy lessons not just on managing the money but wider issues such as prenuptial agreements, buying a home, the best equity-to-debt ratio and even their own estate planning needs, says McQuiston.

Clients in their 50s and 60s are more thoughtful than their predecessors were at the same age regarding decisions about wealth transfers to children or charities. And they are more likely to disclose financial information to their kids than previous generations, which allows for family offices to engage in family discussions and engage the next generation on wealth and the framework for that wealth.

Trusts covering entire families

For instance, the family may have a charitable foundation, and younger family members can be brought in early to learn the family’s guiding principles in making donations, says McQuiston.

But he stresses that every family is different in how it handles legacy planning and wills. “It comes down to who the heirs-apparent are as individuals, what they’re capable of, their propensity to spend or not spend, and if they’re going to be good custodians of wealth or need some help along the way.”

Demo adds that her firm is now seeing trusts set up to cover entire families rather than just individual heirs. “It forces the kids to justify why they need the money they do and to almost compete with other beneficiaries.”

She adds that how parents view their estates and the balance between charity and kids evolves as their wealth grows and as their children mature. The arrival of grandchildren also affects decisions.

Families should also be aware that the will may not present the full picture of what is being passed from generation to generation or even whether all children are receiving equal distributions, says Demo.

“I can speak from the planning we do with our clients that optics count for a lot. Wills are public documents, and anyone can see what is distributed in the will.

“Lots of time the distributions are equal in the will for optics, but gifts will be given in advance of a death to kids who are more responsible.”

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