In the process of preparing your will or trust, one question that comes up is this: Should you tell your kids how much you’re worth?
Here’s the short answer: Probably yes. But it’s more complicated than simply giving them a dollar figure.
In all likelihood, your money and property are going to get passed down to your kids when you die. They are going to ultimately find out how much you’re worth (whether you tell them now, or they find out later).
There are two basic approaches: The Avoidance Approach and the Proactive Approach. The Avoidance Approach consists of … well, doing nothing. Don’t tell the kids. Let them figure it out when they inherit the money. And who cares, right? After all, you’ll be gone. The problem is that this risks your kids experiencing Sudden Wealth Syndrome, resulting in poor decisions. Up to 90% of inheritances get lost within a couple generations due to this approach.
The Proactive Approach involves taking proactive steps to instill the value of stewardship (as opposed to entitlement) and gradually introduce your kids to the details. Being proactive often involves the following:
- You use a Dynasty Trust established in a state that allows for assets to be held in trust for centuries. This avoids transfer taxes as it gets passed down through the generations.
- You consider how your grandchildren and great grandchildren (who are probably not even alive yet) will be involved. How will they manage the assets? How will decisions be made? How will the values of stewardship and/or industriousness (as opposed to entitlement) be passed on to them?
- It requires flexibility. The documents and systems you implement today will require ongoing stress tests. What you put in place today may not make sense next year or 10 years from now.
- Take time to introduce the specifics. You likely have various trusts and other legal entities, with trustees, trust protectors, investment advisors, and so forth. You can start to have your children get involved with different entities. Perhaps they can undertake a role such as joining an investment committee.
In my experience, kids often feel out of place in meetings involving family wealth. What is most important is creating a procedure for how kids can be involved on an ongoing basis. This works better than a Birds and Bees conversation where you sit down, share some details and consider it done.
Do you know what I mean about the Birds and Bees conversation? My dad had this conversation with me. And it was so awkward and unnatural. The implication was that sex was shameful and should be secretive. Having a similarly styled conversation about money can also lead to feelings that money is dirty or shameful. That’s certainly not what you want to pass on to your heirs.
The Proactive Approach to preparing your kids to inherit from you may be more work. But it is worth it. You will be building a stronger relationship with your kids. And you will set them up for future success.