Teaching techniques
There’s no one right way to teach your children about money. The best way depends on your circumstances, their personalities and your comfort level. If your kids are old enough, consider sending them to a money management class. For younger children, you might start by simply giving them an allowance in exchange for doing household chores.
This helps teach them the value of work. And, after they spend the money all in one place a few times and don’t have anything left for something they really want, they (hopefully) will learn the value of saving. Opening a savings account or a CD, or buying bonds, can help teach kids about investing and the power of compounding.
For families that are charitably inclined, a private foundation can be a vehicle for teaching children about the joys of giving and the impact wealth can make beyond one’s family. For this strategy to be effective, children should have some input into the foundation’s activities.
Timing and amounts of distributions
Many parents take an all-or-nothing approach when it comes to the timing and amounts of distributions to their children — either transferring substantial amounts of wealth all at once or making gifts that are too small to provide meaningful lessons.
Consider making distributions large enough so that your kids have something significant to lose, but not so large that their entire inheritance is at risk. For example, if your child’s trust is worth $2 million, consider having the trust distribute $200,000 when your son or daughter reaches age 21. This amount is large enough to provide a meaningful test run of your child’s financial responsibility while safeguarding the bulk of the nest egg.
Introduce incentives, but remain flexible
An incentive trust is one that rewards children for doing things that they might not otherwise do. Such a trust can be an effective estate planning tool, but there’s a fine line between encouraging positive behavior and controlling your children’s life choices. A trust that’s too restrictive may incite rebellion or invite lawsuits.
Incentives can be valuable, however, if the trust is flexible enough to allow a child to chart his or her own course. A so-called principle trust, for example, gives the trustee discretion to make distributions based on certain guiding principles or values without limiting beneficiaries to narrowly defined goals. But no matter how carefully designed, an incentive trust won’t teach your children critical money skills.
Communication is key
To maintain family harmony when leaving a large portion of your estate to your children, clearly communicate the reasons for your decisions. Contact your estate planning advisor for more information.