While you want to provide your children with every possible opportunity for a solid foundation in life, yet the most valuable legacy we can offer our children isn’t solely financial; it’s a blend of work ethic and empathy, complemented by the option of a financial gift.
If you find yourself contemplating the idea of leaving money to your offspring after you are gone, it signifies a level of financial security many aspire to achieve. Nevertheless, here are 7 reasons why you shouldn’t leave inheritance to your kids.
1. Kids will have better work ethic
Experiencing poverty is undoubtedly challenging, but it’s important to acknowledge that prosperity comes with its own set of challenges. Those who have built their wealth from the ground up often hold a strong desire for their children to inherit not just their riches but also the work ethic and values that were instrumental in their success.
Take, for instance, actor Jackie Chan, who made headlines by allocating half of his substantial fortune to charitable causes while leaving nothing to his son.
Chan’s rationale behind this decision is this: he firmly believes that his son should be capable of earning his own income, thus instilling in him the essential values of hard work and self-reliance. In Mr. Chan’s view, gifting his wealth without the corresponding ability to manage it would ultimately be a disservice.
It’s a sentiment shared by many self-made individuals. While no parent wishes for their children to face financial hardships, there’s a growing recognition that providing them with the knowledge, skills, and work ethic to generate and manage their own wealth may constitute a far more valuable legacy than the money itself.
This approach fosters independence, financial knowledge, and a profound appreciation for the true value of wealth.
2. No entitlement
Raising a child who feels entitled is every parent’s nightmare.
This principle holds true for Hollywood couple Mila Kunis and Ashton Kutcher, who have made headlines with their decision to leave their substantial $265 million fortune to charitable causes rather than their own children. As Kutcher puts it, “My kids are living a really privileged life, and they don’t even know it.”
Their commitment to raising children who are not spoiled is evident in their deliberate efforts to limit extravagant gifts, allowing only one Christmas present per year. This conscious choice aims to cultivate gratitude over entitlement, reinforcing the idea that their children should appreciate the true value of hard work and the significance of giving back to society.
In a world where excess and privilege often dominate, Mila Kunis and Ashton Kutcher’s approach serves as a compelling reminder that a rich inheritance isn’t just about monetary wealth; it’s about imparting valuable life lessons and nurturing a sense of responsibility and empathy in the next generation.
3. Most inherited money is wasted
Entrusting adult children with a substantial sum of money in the future won’t fix their current financial mismanagement issues. It’s wrong to believe that a sudden influx of cash will magically resolve their financial issues.
The statistics offer a reality check. A disheartening one-third of Americans who come into inheritances end up wasting their inheritance. Astonishingly, within a mere two years of receiving their inheritance, most find themselves in a bad financial state, marked by negative savings and a even worse financial position than they were before.
Furthermore, research paints a concerning picture of the generational wealth cycle. It reveals that an overwhelming 90% of families who inherit wealth end up losing it by the time it trickles down to the third generation. This pattern highlights the challenges in preserving and growing family wealth over time.
These findings emphasize that leaving wealth without financial education and responsible money management skills can strengthen a cycle of financial instability rather than providing lasting security. That’s why fostering financial literacy and a prudent approach to wealth management is crucial, not only for the present moment but also to ensure a prosperous and secure future for generations to come.
4. Estate taxes
Estate planning often involves managing inheritance taxes, which can potentially decrease 40% of your assets before they reach your children. However, there exist strategic measures to safeguard your wealth and ensure that a significant portion is preserved for your children’s benefit.
A prevalent strategy among the affluent is to proactively gift money to their children during their lifetime, thereby mitigating potential estate taxes. The Internal Revenue Service (IRS) allows for tax-free gifts of up to $17,000 per year per recipient, or double that amount if the recipient is married, enabling a substantial wealth transfer without incurring taxation.
Additionally, individuals can explore various methods to reduce their tax liability, such as establishing donor-advised funds (DAFs), leveraging life insurance policies, forming family limited liability companies (LLCs), or implementing generation-skipping trusts (GSTs).
5. Gold diggers
Individuals who become the target of lawsuits typically have valuable assets, making them attractive targets for legal action. When a substantial inheritance is in the picture, it can inadvertently make your children susceptible to such legal challenges. The last thing you want is for the wealth you intend to pass on to your heirs to become a liability, painting a target on their backs.
There are many examples where legal actions have eroded or entirely consumed an individual’s inheritance. These situations often arise from seemingly trivial claims or instances of unintentional negligence, including scenarios such as dog bites, car accidents, or accidents involving swimming pools. These unexpected events can lead to lawsuits that put the inherited wealth at risk.
Therefore, it’s imperative to take proactive steps to safeguard your children’s inheritance. This can involve strategies such as asset protection trusts, liability insurance, or setting up legal structures like family LLCs to shield their assets from potential legal entanglements.
By doing so, you can ensure that your children’s inheritance remains intact, secure, and ready to serve its intended purpose, rather than becoming a target for unforeseen legal challenges that could diminish its value.
6. Increased chances of bankruptcy
Considering potential challenges that may fall on your child in the future is yet another compelling reason for a second thought regarding inheritance.
The United States witnesses a staggering annual figure of approximately 400,000 personal bankruptcies. What’s noteworthy is that a substantial majority, about 66%, are primarily triggered by medical expenses or sudden job loss—two factors largely beyond an individual’s control.
Regardless of whether a bankruptcy stems from circumstances beyond your child’s influence or is a consequence of their own choices, the last thing you’d want is for the wealth you’ve accumulated to end up being claimed by federal bankruptcy courts. This can effectively nullify your intention to provide financial security and support for your child’s future.
To sort this issue, it’s wise to consider estate planning measures that safeguard the assets you wish to pass on. This may involve creating trusts with specific provisions to protect inheritances from creditors or structuring inheritances in a way that ensures they remain intact even in the event of unforeseen financial hardship.
7. Don’t sacrifice your future
Parents often experience a profound sense of duty when it comes to leaving something behind for their children, or at the very least, sparing them the burden of covering funeral expenses. However, it’s crucial for parents to prioritize their own financial security, housing, healthcare, and overall well-being before contemplating monetary gifts for others. This approach aligns with a growing trend among affluent individuals who recognize the importance of securing their own futures first.
Parents consistently provide their children with various opportunities to thrive and succeed in life. It remains the responsibility of these young adults to harness these opportunities, exert effort, and cultivate a strong sense of self-worth and accomplishment.
This perspective underscores the significance of financial planning, emphasizing that parents should ensure their own financial stability as a foundational step in securing their children’s future. By establishing a solid financial footing and imparting valuable life lessons, parents can empower their kids to create their own paths to success, fostering independence and self-sufficiency rather than solely relying on financial legacies.
