The Impact of Wealth on Children and Families: Lessons Learned

In my over two decades of advising families of wealth, I have learned that wealth can be a wonderful blessing, a key that opens doors to many of the most enjoyable experiences life has to offer. Sometimes, however, so much attention and energy is devoted to earning wealth that not enough time is spent on how best to integrate wealth into the lives of family members. I’ve had the privilege of working with some amazingly impressive, creative and successful people. Even some of the best of them, however, have initially struggled when determining the best way to integrate their wealth, and its often life-changing characteristics, into their family structure.

For example, early in my career, a client greeted me with this opening statement as I sat down to meet with him: “I give myself an “A” at making this money, but more like a weak “C“ at what seems to be coming next.”

I assumed by “what seems to be coming next” he was referring to the task of preserving his wealth, so I began mentally preparing my thoughts about best choices in asset allocation, manager selection and the like when wealth preservation is the priority. To my surprise, however, before I could respond he clarified that he’d spent years focusing on accumulating wealth, but virtually no time considering how the level of wealth he achieved could best be integrated into his life—and more importantly, the life of his family.

He was particularly concerned about his children. He’d started from humble beginnings and worked hard to get to where he was now, and wished to instill some of those same values in his children. How could he do that, he wondered, when their lives were already so different from his own when he was their age?

This client may have been the first to pose this question to me, but he was certainly not the last. In fact, determining the best and most beneficial way to assimilate wealth into your family structure, and make it a consistent positive in the lives of your children, is often an unanticipated and initially daunting issue. Therefore, increasingly, I advise clients to plan early to make sure that their children have a healthy view of the family wealth and the role it plays in their lives. Over the years I have developed a list of short, but important, top tips and takeaways regarding wealth and its implications for children and families:

1. Even at a young age, children are perceptive—often more than we realize—and they can form early opinions and assumptions about family wealth. It’s almost never too soon to begin modeling, by word and deed, your attitude towards your wealth.

2. Many of my clients have wanted their children to learn that money usually comes from personal effort and hard work, not family wealth, and these lessons have taken many forms. Some clients have staked their teens with small pools of funds for investments, so they’ll learn something about the level of skill, study and patience necessary to become a successful investor. Other clients have asked their teenage and college age children to work jobs or even mow neighborhood lawns to learn the difficulty of working while juggling multiple responsibilities. One particular approach does not fit all, but these considerations can be important for some families.

3. Adult children can benefit from a parent’s success while also being encouraged to build successful lives of their own via a simple but effective “matching gift” incentive system. Under this system, moderate monetary gifts can be given throughout the year for birthdays, holidays etc., but larger amounts are shared as earned rewards rather than unconditional gifts. For example, the W-2 gross income of adult children can be matched in equal measure by gifts from wealthy parents, e.g., if an adult child earns $50,000 per year via his/her job, the parents will provide up to an additional $50,000 in matching funds. If the gift is over the annual gift tax exclusion amount ($15,000 for 2018), the parent would be utilizing a portion of their lifetime exemption amount. In making a gift in this way, however, adult children are still benefiting from family wealth, while also being continuously incentivized to earn as much as they can during their lifetime.

4. If regular distributions to adult children are anticipated, it may be a good idea to have a trustee control payouts, in accordance with the terms of an irrevocable trust. Parent/child relationships are often multilayered enough without the parents serving in the added role of controller of the purse strings—particularly if the trusts require specific actions before disbursements can be made. For example, some irrevocable trusts provide distributions to adult children based on a “matching “ gift incentive program similar to that described in point #3 above, but with the added condition that children must set aside a portion of their gift to make investments for their future, or invest in an entrepreneurial type business. Trusts like these allow children to learn the importance of planning for their future via either traditional investments or the establishment of their own business –—and just as importantly, they allow the trustee, not the parent, to be the one controlling distributions and serving as point of contact.

5. A family foundation can be a great way to educate family members about the power of wealth to do good and positively impact the lives of those outside the family. It may be especially beneficial to have children participate on the board of such a foundation. Wielding the power of a grantmaker can teach younger children about money’s potential for positive change, and allow older children to develop specific charitable interests and support favorite causes and programs. And for all family members, the interchange and consensus building required by the process of selecting grantees can positively impact family dynamics (see my related white paper, “Creating and operating a family foundation: four keys to success”, for tips on how to ensure family foundation processes go smoothly.) A Donor Advised Fund (DAF), which is a charitable giving account set up at a sponsoring organization like a local community foundation or nonprofit arm of a financial services firm, can also accomplish most of these same functions. DAFs can be a good option if a family does not wish to undertake the moderate legal and administrative responsibilities associated with a private foundation.

6. Sometimes children from wealthy families can be targeted by those who wish to take advantage of them. Pitches for wild schemes, too-good-to-be-true investments, requests from dubious charities and asks for large but loosely defined “loans” can all be experienced by younger members of wealthy families. Fortunately, all these problems have one solution: education. The more you continuously educate your children, young and old, about the best ways to handle wealth, the more likely they are to be able to smoothly steer around these potential bumps in the road.

Successfully integrating wealth into the family structure can sometimes be a surprisingly challenging task. And of course each family is unique, with its own experiences and priorities that will shape its decisions. Based on my experience, however, following considerations like the ones outlined above can smooth out the process for all involved, while also leading to a greater appreciation of family wealth and how best to utilize it.