Leaving an Inheritance: Three Trains of Thought

Today, Mr Credit Card from www.askmrcreditcard.com is going to share with us his views on how our views on inheritance. Regular readers will know that I’m not a fan of credit cards. But if you happen to be looking for a new card, please check out his best credit cards section. Mr Credit Card has also written about other topics like identity theft protection which you may find interesting.

Inheritance is a topic very few folks talk about. This is pretty normal since most of us are concerned about reducing debt, worried about our mortgage etc. It seems that only the truly wealthy folks spend time debating this topic. But I feel that we should (when we have the time) try to think about this because I feel this will affect how you view money and how you raise your kids and even your political views on money! Joe has written a couple of post here before about inheritance and entitlement. I would like to share my views on these and hopefully expand on the topic.

The biggest issue the ultra wealthy face is how much to give their kids when they leave this world. Most have set up philanthropic foundations. But the questions of how much to give your kids is the hardest thing for most. On the one hand, you want to leave them something. Yet, leaving them too much will mostly likely result in them getting soft and lazy and losing their drive to succeed in life. Folks who have attained great wealth have done so with lots of hard work and sacrifice. They were more driven than the average person. They also know that if everything comes too easy, then you will lose motivation to work hard.

I think there are three choices you face with regards to inheritance.

Leave every thing to your kids

The first point of view is that you leave everything to your kids. All your wealth. And keep it for future generations. There are obviously many ways you can do so to have some checks and balances. The key idea to this thought is that you should endow your future generations so that they never have to worry about money. And if they do not have to worry about money, they are free to pursue their dreams and ambitions and perhaps focus their efforts on charity.

There is a downside to leaving all your inheritance to your future generations. Firstly, they lose their motivation for work. After all, if you know there is always money in the bank, you will never push that extra mile. In fact, I’ve witnessed countless times folks with inherited wealth who are just “not hungry” enough. And to be honest, you cannot blame them because they are simply reacting to their situation. The more wealth you have, the more risk adverse you will be. Look at the British aristocrats today (the dukes and earls). Have any one started a really innovative company? Has anyone of them been a successful sports person? Hardly any!

Donate most of your wealth to charity and leave enough so that your kids will never starve but will still have to work

Warren Buffet and Bill Gates belong to this camp. In fact, Bill Gates has set up his foundation (the Gates Foundation) and is heavily involved in all sorts of charity work. He said he will leave some money for his kids (enough that they will never be on the streets) but not enough such that they can goof off for the rest of their lives.

I personally would subscribe to this view as I think you kids deserve something from your efforts and at the same time, you want them to be hungry and achieve things in life.

Leave your kids with nothing

Obviously, you can choose to leave them with nothing. In fact, many folks leave their kids with nothing not out of choice, but simply because they died poor! It is not the end of the world if you kids inherit nothing from you. If you have brought them up well, they should be able to make a living for themselves.

Money shouldn’t be the only inheritance you leave

Amidst all the talk about inheritance, I think it is important to ask ourselves if money is everything when we think about inheritance. If you leave nothing for your kids, they could still be very successful. So instead of pounding our heads about how much to give, we should also focus on the following:

Teaching your kids to fish

Leaving an inheritance for your kids such that they do not have to work another day is tantamount to catching the fish for your kids and cooking it for them! They would enjoy the fish, but they would never learn how to catch or cook it. I think this is where the concept of spending time with your kids and developing a relationship with them becomes so important. Being a strong mentor to your kids perhaps is the most important thing you could teach them.

Teaching kids the value of hard work

Having three kids myself, I think teaching your kids the importance of working hard (and obviously smart) is so important.

Teaching your kids how to handle wealth

How many of us teach our kids about handling money? Not many. But I think that teaching them this skill is one of the most important legacy you can leave your kids. It means teaching them about the importance of spending less than they earn, of paying themselves first, and teaching them about the dangers of debt. That is so important because when they get to college, you can’t really stop them from applying for a college student credit card. Financial education is best taught before a child earns his money or can apply for a loan!

Once you have taught your kids to fish and cook it, then what?

Well, you have to face the three choices. You can choose not to leave them anything and leave everything to charity. Or perhaps you will not die wealthy. But if you have brought up your kids well, then they should be able to fend for themselves. Personally, if I were really wealthy, I would go with the second choice, which is to leave them enough so they would not starve but not enough that they do not have to work for the rest of their lives. I would reject the first choice of leaving everything to them (even in a trust where they cannot squander everything) because I think once we get things too easy, we lose our drive to strive for perfection. We get careless and lose our sharpness.

Things never turn out well when life gets too cushy

Just look at the welfare states in Europe. Look at Greece and their generous pension plans. Or the Spanish taking siestas in the afternoon! The Greeks are now not competitive. Have you bought anything recently “made in Greece”? Or closer to home, look at what cheap monetary policy and printing money resulted. Instead of letting recessions truly cleanse the bad business decisions, the Fed always lowers rates. Extended cheap monetary policy lulled us into a false sense of complacency. As a result, we all think that the Fed will always bail out the economy, and leverage and debt increased. Lenders make bad decisions. Even households and consumers like us made bad decisions, because there always seem to have that “safety net”. And you can’t really blame them when housing prices keep going up, when you can get zero down mortgages, cheap home equity lines of credit, 0% financing for cars and even furniture, and even do balance transfers with credit cards! Even subprime borrowers could get access to credit!

On a personal level, I’ve seen folks who have inherited lots of money not having the drive and hunger that I see in some folks. Somehow, they seem not to care so much, not willing to put in extra hours, not as concerned if things do not work out. Perhaps it’s just me, but I’ve come across too many instances to think it’s just a coincidence.

Final Thoughts

I think it is OK to leave some inheritance to your kids as a safety net (but perhaps no more). Once someone gets down the path of entitlement and having enough money to goof off, it will rub off on the future generations. And the last thing you want is to have your future generations get lazy and unproductive because of some inheritance you have left. They key term here is “safety net”. What constitute a safety net? When is enough enough? I do not know the answers. Perhaps we can leave this discussion for another day.

photo credit: quinn.anya

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