How to stop your children blowing their inheritance

family finances, inheritance, Planning

How to stop your children blowing their inheritance

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3 minute read

Whether you have gone from rags to riches or your family is from old money, you want to preserve your wealth for generations to come. Many parents fear that their children or grandchildren will blow their inheritance. So, how do you prevent this from happening and avoid your family going from riches to rags?

In the next decade, trillions of pounds will be transferred from one generation to the next. In fact, 70% of families lose their wealth by the second generation and over 90% of families lose their wealth by the third generation.

Wealth can get lost through generations for a number of reasons, including family business closure, bad investments, or natural dilution of assets as they are shared among generations. However, the most significant cause of loss of wealth is ill-prepared wealth stewards. In other words, generations blow the wealth without contributing to building the family fortune.

The culprits are usually family members who have grown up wealthy and are removed from the work ethic and the drive of the people who made the money for them.

Capital’s financial planners have experience of transferring wealth across generations for wealthy families. Families who successfully maintain their wealth through multiple generations do three things in common, as described below. These are the suggestions to stop your children from blowing their inheritance:

1. Get over the money taboo

Family finances are often an unpopular topic of discussion, especially if you are worried that family wealth might spoil your children.

Many parents deal with their finances secretly to avoid their offspring knowing how wealthy they are and becoming reliant on their future inheritance.

However, keeping the family finances a secret can mean that children do not learn how to manage money. Being open about the family finances allows you to set a good example.

Bringing your children or grandchildren to a family financial meeting with your financial planner is a good idea. This will teach them all the integral aspects of managing wealth. Dealing with significant wealth can be a lot more complicated than expected, with all the existing rules and regulations. Preparing your children for this is key. Teaching them good money behaviours will ensure that your wealth is well looked after.

Intergenerational meetings can help set expectations and boundaries for their inheritance. If you would like them to have the money gradually, your financial planner can work with them on income planning. In addition, they can help to create a financial plan for the money they will inherit. Sometimes an inheritance is better given with a warm hand, as it allows the children to use the money when they most need it. For example, buying a house, putting the grandchildren through private school, or starting up a business. Intergenerational meetings can help bring these situations to life. If you are considering gifting your children some of their inheritance early, read our blog: Why you should gift your adult children their inheritance early.

2. Embark on a mission

In the words of Bill Gates, the man who gave 85% of his wealth to charity: “With great wealth comes great responsibility”.

The legacy you leave should be about more than money. A family mission can help support family values and ethics, as well as creating a sense of purpose. This is particularly the case if you have the means to make a difference to the lives of future generations or special causes.

Standing for something is important; having strong values and ethics that run through the core of your family. This can give your heirs a sense of responsibility and prevent them from blowing the family wealth.

Many families ensure that their mission continues for generations by having a mission statement. If you need help getting started, use Vanguards’ drafting your mission statement template.

3. Raise money smart children

According to business insider, only 24% of millennials demonstrate basic financial literacy. It seems that millennial children didn’t get a good financial education at school. Although this is improving, the onus lies with parents. Conversations about savings, investing, and charitable giving will help develop their money management skills.

Teaching your children good money ethics can help them to be financially independent and have a healthy relationship with money. There are many ways you can help teach your children good money manners growing up. For some helpful tips, read our blog: A pocket guide to children and money.

However, how you behave with money will have a stronger influence on your children than what you teach them. “Children learn more from what you are than what you teach.” -W.E.D Dubois. Make sure you have a positive relationship with money and demonstrate good money behaviours. If you are good with money and saving, then your children are likely to pick up on these positive lessons.

If all the will in the world won’t stop your children or grandchildren blowing the family wealth once you are no longer around, then an Incentive Trust may work best.

To discuss your estate with a chartered financial planner, contact Capital today.

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