Transferring Wealth to your Heirs - Part One

When I asked a couple what they would like their money to do after they are gone, the husband quickly joked that any money that was left over would be their kid’s problem. Little did how know how prophetic his words were.

Baby boomers have been impacting the American economy like a gigantic tidal wave since they first hit the scene with their large numbers. Initially they drove the baby food and diaper industry. As they grew they burdened America’s schools and playgrounds. When they married and began buying homes the real estate markets soared. Now as they reach retirement years they’re pouring money into cruise ships, senior housing complexes, pharmaceuticals, and ironically enough, diaper companies again.

But what happens when the tidal wave ends? Where does all the leftover money go, and is the next generation prepared to receive it?

It is no secret that many heirs, like lottery winners, quickly waste away the money. This often leads to a worsening of their condition as shown in the following common scenario:

Mom dies and leaves her son Larry a $400,000 inheritance. Typically Larry, like most younger Americans, has been living paycheck to paycheck and so the inheritance is viewed as a blessing. Larry initially commits to using the money wisely, but there are a few things he wants to do first. He always wanted to take the kids on a nice cruise, the old car was due to be replaced, that new ski boat would be a great family activity, the furniture has been getting old, and finally the family house really never was quite big enough. He is surprised when one year later the money is all spent, which, by the way is the national average for spending down an inheritance.

Now Larry finds himself in a bit of a predicament. Keep in mind that before mom died he was already living week to week. Now he has a bigger home with higher property taxes, power bills and maintenance, an expensive boat, a new car and likely a couple of ATV’s, all of which need to be maintained. In the end Mom’s money allowed Larry to step into a new lifestyle that his current income cannot support. His family is worse off financially than if he had not received the inheritance in the first place.

Why does this happen? Because humans do not appreciate that which they have not earned. My clients carefully guard their money because they spent 40 years sacrificing to obtain it. Their kids do not view it with the same level of respect.

The next 30 years will bring the largest generational transfer of wealth in world history. The scenario diagramed here, which is real, will be played out many more times over those years. Perhaps the next great challenge of today’s retirees is figuring out how to leave money to their kids in a way that will bless their lives, and not curse them. Just letting it be the kid’s problem is an unacceptable solution. Part two next week…