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WHEN STEWART MOTT graduated college in 1961, he received $6 million from his father, an auto industry entrepreneur who was one of the founders of General Motors. On top of the $6 million, a family trust began paying Mott an annual stipend of $850,000.
That allowed Mott to spend his adult life pursuing a variety of eccentric endeavors. He funded research on extrasensory perception. Inside his Manhattan apartment, he built a 10,000-square-foot garden, along with a chicken coop. He also spent time living on a junk in the Hudson River. In addition, Mott loved politics, so much so that, at one fundraiser, he arrived with a live elephant and two donkeys.
While Mott was unique, stories like this are not uncommon. Inheritances can yield unintended consequences. That’s why Warren Buffett always said that his goal is to leave his children “enough so that they can do anything, but not so much that they can do nothing.” This may be easier said than done.
How can parents best help their children? In my experience, this is one of the hardest questions in personal finance. In fact, I believe it’s the hardest question because it lies at the intersection of several other complicated questions. It isn’t strictly a financial question, or a tax question, or a parenting question. Rather, it’s all of the above. If you have children and are trying to think through this topic, you might consider these seven steps:
1. To start the process, I suggest this: Imagine you had a magic wand and were able to cut through all the complexity to create the perfect outcome for your family. What would it look like?
To better illustrate this question, imagine a spectrum of parenting approaches. Stewart Mott’s father, who enabled his children to lead lives of luxury, would be at one end of the spectrum. Meanwhile, someone like Mick Jagger, who has communicated to his eight children that they’ll need to be self-sufficient because he may leave all of his assets to charity, is at the other end of the spectrum.
While these are extremes, they may serve as reference points as you develop a picture of what you’d like for your own family. For example, some parents want to help their children graduate from school without student loans, while other parents want to help their children purchase their first home. Some parents simply want to do as much as they financially can.
I suggest starting at this big-picture level because the topic is so complex. By doing so, you avoid details that may cause you to see obstacles before you find solutions.
2. If you have more than one child, consider your definition of fairness. For some parents, this means treating each child exactly the same, regardless of differing financial circumstances or needs. For others, helping each child according to their individual circumstances may work best. For example, if one child is a physician and the other a schoolteacher, some parents feel it would be unfair to treat them equally.
Children can differ in other ways. One child might be thriftier, while another has trouble managing money. One child might simply live in a more expensive part of the country. Some children have disabilities that require ongoing care. Should all these children be treated equally?
3. Another consideration is how much complexity you’re willing to embrace to get the outcome you want. For example, you could move assets into an irrevocable trust. This type of structure can help moderate future estate taxes and provide other benefits, such as greater control of the bequest’s assets. Would you like to avoid a Stewart Mott scenario? Trusts like this typically limit distributions to uses that are deemed productive, such as buying a home.
But setting up an irrevocable trust requires legal services and thereafter careful accounting. This type of trust also requires the ongoing involvement of a trustee, who might ask to be compensated. And even the most intricately thought-out provisions aren’t guaranteed to produce the desired results. Trusts that are too restrictive can lead to resentment. Some trust beneficiaries spend their entire adult lives battling tightfisted trustees. That’s why some families prefer a simpler path, even if it means relinquishing some control, along with potential tax benefits.
4. If charitable giving is important to your family, make it part of your plan. Some families try to dovetail estate tax planning with philanthropy by specifying that any part of their estate that is over the lifetime exclusion—or in excess of some other specific number—should be donated to charity.
5. If your estate includes unique assets, such as a vacation home or a business, be especially careful. These can be the most difficult to divide among children and can also carry the most emotional baggage.
6. Another key decision: When would you like to make these gifts? Some parents prefer giving during their lifetime since this allows them to see the impact of their gift—such as helping a child buy a first home. It also gives them the opportunity to see how children handle smaller amounts of money before giving them larger sums. These early gifts can be particularly helpful to children in their young adult years, when life is most expensive.
On the other hand, some families prefer to bequeath all assets to their children. In doing so, parents avoid struggling with the question of how much they can afford to give during their lifetime. Another reason some families prefer this approach: They don’t want money to become a factor in their relationship with their children. In addition, giving only by bequest can help avoid diminishing their children’s work ethic during their early adult years.
7. Money can be a taboo subject. Still, I suggest transparency when it comes to family gifting. Let your children know your plans—and the thinking behind it.
In a recent letter, Warren Buffett mentioned that he updates his estate plan every few years. While he may be at a different financial level than the rest of us, it’s a reminder that the plan you develop today need not be the permanent plan. Some plan is better than no plan. Follow Buffett’s lead in updating your plan as circumstances—and your thinking—evolve.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
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In my experience, #7 is the hardest for most families to manage. Among the reason given are: 1) I am afraid my children will take advantage of me if they know how much money we have, 2) My kids will do nothing productive if they know they can count on a fat inheritance, or 3) It’s none of their business.
I always counseled families to discuss their estate plans, especially if the plan included an uneven distribution. Talking about your plans ahead of time can diffuse a lot of hurt feelings and confusion after you are gone. It provides children with a chance to ask questions, but it also needs to be made clear that they don’t have a vote in how your estate is divided.
I always thought it was a little funny that America, with all principles of hard work and earning your keep and the whole bootstraps thing, clings so hard to passing inheritances on the future generations. Doesn’t that seem like a terrible idea for a society that espouses meritocracy? It will always lead to unfair advantages and the perpetuation of wealth, education, and ownership inequality. I just wonder what it would look like if you couldn’t pass money on at all? Like a 100% tax assets at death or something of that nature. Just an idle thought.