Should You Support Your Children Financially?
Updated: Jul 17, 2020
One of the most difficult challenges for wealth holders is how to use wealth to help their children. There are a number of things to consider.
• How should love and caring be translated financially?
• How much is enough help? Perhaps most importantly, when is it too much?
• And what about providing for future generations?
Wealthy parents often fall into one of two camps.
ONE: THE 'LET IT FLOW' CAMP In some families the money tap is turned on when children are young and just keeps flowing throughout their entire lifetime. These kids are given everything they need and a whole lot more. These endless acts of giving on behalf of the parents are usually driven by love and generosity but they can have a downside. Whilst it isn't true in every case, creating financially dependent children can inhibit the motivation they need as individuals to fulfil their human potential in life and it can encourage children to be reckless with the money which was hard earned somewhere back down the track. These adult children don't always make financially sensible decisions.
TWO: THE 'WE DON'T TALK ABOUT MONEY' CAMP In contrast, there are many children from wealthy families who never have any idea that they may one day inherit millions. Whilst most of them have probably enjoyed the advantages of an affluent upbringing and private school education some research suggests that around 64% of wealthy individuals don't talk to their children about how much money they have. Whilst this avoids some of the problems inherent in creating financially dependent children, it can also leave adult children completely blindsided when they do inherit significant wealth. They can be ill-prepared for the responsibility which leads them to make poor financial decisions. Large sums of money also have a habit of igniting family disputes if there hasn't been clear communication around what it is intended for. There have been many family fortunes lost to lengthy legal battles even when there is a will in place.
Having worked with high net wealth families for nearly two decades, Paul Barrett, Director of Absolute Wealth Advisers believes that the most healthy approach lands somewhere in the middle.
"If your goal is to create functional children who can become all they can be – to fully self-actualise and chase their dreams, then financial security is a critical underpinning. It is financial certainty, not deprivation nor drowning your kids in money, that will lead to secure, well-balanced children of wealth."
Paul explains, "It is important to give your children age appropriate exposure to financial education in the knowledge that they will become the custodians of your money at some stage and it will be their responsibility to manage that money guided by your family values and informed decision making."
But what constitutes the right level of financial security for your children? In finding the right answer you need to start here.
STEP 1. YOU FIRST
Before you think about whether you’re giving them too much or not enough, it’s important to focus on the first order of business: Yourself.
What will you need to live your golden years on your own terms? That is not an easy question. Many people underestimate the costs of living, particularly if you live way past 85 years of age. If your choice is between having too much money because you die relatively young or too little because you live too long, plan on ending up with more money than you need. How much money might that be? Begin by considering that 24-hour medical care may well exceed $250,000 per year. To generate that kind of income, you’d need $5 to $10 million invested. What if you want to live a little more adventurously? If you're the kind of person who spends six months a year travelling on business class flights and staying in 5 star accommodation - you may need to triple your investment reserve in order to cashflow your lifestyle. You can keep adding to the figure depending on your personal needs and desires, but it is not unreasonable for high net wealth parents to say that they may need the first $10 million -$30 million for themselves. You shouldn’t feel guilty about setting aside so much for yourself. Ultimately, the more you can do to ensure your own care, the more you are helping your children. There is no universal formula to determine the amount you keep for yourself. You will need to run the numbers and make decisions based on how you want to live in old age. Your Wealth Manager will be able provide you with financial forecasts for a range of scenarios. Until you have done that, you are not really prepared to start giving money to your children. STEP 2. SETTING YOUR PRIORITIES
Once you define your own needs, you have to set priorities that reflect your attitudes about helping your children. Your priorities might include the following: Education for future generations
In an uncertain world where change is fast paced, providing a good education and learning opportunities for future generations can help your family members thrive, while enshrining your legacy for decades. Education has been outpacing inflation for decades. In Australia private schools can charge upward of $40,000 per year. The total cost of private schools, boarding schools, and university colleges can now exceed $600,000 per child. The basics - food and shelter fundamental for life
Providing for basic food and shelter will give you the comfort of knowing your descendants won’t become destitute. Wealth holders in high-cost urban centres who want children and grandchildren living nearby may need to find the millions of dollars to buy each house for their adult child. In capital cities such as Sydney and Melbourne a modest house starts at $2 million. Many wealth inheritors will need to spend $5 million or more to find a home similar to the one in which they were raised. Holidays and retreats for the family
For parents who want to remain connected and relevant to their children another priority can be funding family holidays. Whether this is an investment in a holiday home or a commitment to take regular trips overseas together this can use up a sizeable chunk of family wealth.
An enterprising son or daughter may ask for start-up funding for an entrepreneurial
venture. This is always a tricky one as it provides an opportunity for your family member to pursue their passion and possibly fulfil their potential - a high value purpose for money - but it could either lead to a significant strengthening or a significant weakening of the long term financial position of the family depending on their level of success. Family capital rounds of $5 -10 million are not uncommon. Do you invest? And under what terms? It pays to have put forethought into this possibility well before receiving the request. If entrepreneurialism is something you value and want to support, think ahead about the specific criteria your children would need to meet to obtain funding. This is not a decision which should be made in accordance with how firmly your children tug at your heart strings! Having clear requirements for funding also keeps the playing field fair of you have more than one child who requests startup capital. Your advisory team (wealth manager and accountant) can help you set your criteria and objectively assess each opportunity.
Charity and community based activity
An important priority may be strengthening your community through philanthropy. Allowing children and grandchildren to grow up feeling part of the community, which created and nurtured their wealth – and to live in a world of peace, beauty, health and enlightenment – is not a completely altruistic goal. Indeed, it can be as important as education for many wealthy families. Caring for your children in their old age
You may place a high priority on ensuring that your children have enough to live comfortably in their old age. The same process and financial assumptions you used to determine your own needs in old age can be applied to the needs of your children. Although providing for your children in retirement is not an unreasonable priority for a parent, it has some challenges. This type of support of a descendant may result in or require the support of in-laws, partners and step children as well. You may need to consider legal agreements if you want to ensure control of this money stays with certain family members. Some wealthy people make the choice of contributing to superannuation funds for their families as a way of growing and protecting capital for this purpose. This strategy can be tax effective in the right circumstances (consult with your wealth manager), it limits children's exposure to family wealth to a time when they are more mature, and it benefits from compounded returns over the long term.
All of these priorities need to be carefully considered before you decide how you will treat your wealth, but the key priority – taking care of yourself – should always come first. Even for most high net wealth families, doing everything is impossible. For the sake of family harmony it is best to your set priorities to determine what the wealth is for, communicate that to your family, set the right structures in place and then stick to the plan.
Written by Paul Barrett: Director and Co-Founder Absolute Wealth Advisers Our Family Wealth Pathway is designed to methodically address each of the steps involved in planning and implementing the transfer of your wealth to future generations in a way which preserves both financial prosperity and family harmony. We offer a free 2 hour consultation to discuss your circumstances. You can book an appointment with me HERE. In the meantime, I'm happy to answer any of your questions via email.