Those who receive an inheritance with the passing of a loved one are potentially given the gift of financial freedom if they choose to manage the wealth carefully. Did you know that only about one-third of adults have a prepared will, and about 40% with investable assets of $1 million or more never discuss their estate plans with their children? The reality, however, is that the percentage of squandered inheritances is troubling. Studies indicate that 70% of inheritances are exhausted by the second generation, and a whopping 90% is gone by the third.
There are a variety of causes for the money to deplete so quickly, including spending sprees on unnecessary expenses (fancy toys, expensive clothes, jewelry, and lavish vacations), poor financial decision-making, taxes, and a lack of communication between parents and children.
While family conversations about legacy and inheritance are important first steps in estate planning, discussing money matters can be stressful and emotional, so it’s common for parents to avoid the topic instead. Other reasons that may make parents hesitant to talk to their children about passing down their wealth include:
- Entitlement – Children may feel as if they are better than everyone else because they are receiving a significant amount of money.
- Motivation – Knowing that one day they will have money passed to them will affect their motivation to pursue their own financial journey.
- Wealth management – Parents want children to understand how to manage money and if they know money will be given to them one day, they may be inclined to consider what material things they will buy instead of understanding the value of managing their finances.
- Understanding the value of a dollar – Having to work for your own money forces you to understand the value of a dollar and that money isn’t made easily.
At what age should parents and children discuss estate planning and inheritance?
Children can benefit from understanding the emotionally and financially complex world of financial planning as early as their 20s. They can learn the structure, details, and management of an estate plan and the importance of wealth preservation when it is passed down in the future. Being prepared can help to mitigate problems, challenges, and risks that could appear later on.
Beneficiaries that are intent on making their inheritances work for them can take steps toward financial independence by considering the following:
- Resist the urge to spend the money and continue living as you were before.
- Consider safe investment opportunities based on your risk tolerance.
- Consult a financial professional.
How can parents get started talking to their children about their wealth?
Transparent communication: Parents should be open and honest with their children about their finances. This can open the door for questions and essential conversations on what the parents expect and hope for when it comes to the financial management of their assets.
Share values: Both parents and children can share their values and work to align expectations. Once children understand their parent’s wishes, parents may be more open to discussing inheritance regardless of the children’s age.
Schedule an appointment with a financial professional: Consider scheduling an appointment with a financial professional who can help you manage your inheritance by creating investment and savings strategies and long-term goals.
Create a plan: Preparation is critical when it comes to pursuing any long-term goal or strategy. A financial professional has the skills and experience to help both parents and children understand how to manage their finances now, and design a plan for the future with the knowledge that estate and tax law and the market may be completely different than it is today.
Schedule that appointment today and get a head start on working to preserve your hard-earned wealth for generations.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
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