Five years ago, Bill Bonner, my friend and business partner, asked me to speak to a group of about 50 old, wealthy white people meeting in an exclusive beach resort. He wanted me to discuss “the challenge of intergenerational wealth.”
What the heck is intergenerational wealth?
It’s the wealth you’ve acquired for your children, grandchildren, and maybe even your great-grandchildren.
The challenge is how to preserve it. History tells us that people usually squander any money they inherit. And if they don’t squander it, their children surely will.
This is a serious problem for seriously wealthy people. But I believe it’s a problem for middle-class people, as well.
It’s not just about keeping your kids from throwing away the money you worked so hard to save. It’s about keeping that money from turning them into the kind of adults you don’t want them to be.
The experience of speaking to that bunch of 50 grumpy old folks gave me a number of new and useful ideas about this problem. I’d like to share those ideas with you in this essay.
The Downside of Helping Your Children
Let’s be realistic: It feels good to give, and we want to think of giving as a purely beneficial act. (With a stroke of the pen we can make someone’s life easier.) But giving away money – whether to your children or to strangers – often results in unintended consequences… some of them undesirable.
Giving money to your children – at any age – can make them wasteful. It might make them dependent. It might weaken their ambition and strip away their self-confidence. And the expectation of getting money from you might even make them greedy.
It’s easier to understand this when our children are very young. We recognize that giving a small child everything he wants is likely to spoil him.
My wife, K, and I were concerned about this 30-odd years ago, when our children were small. We lived in Boca Raton, where high-income baby boomers climbed over one another in some fiendish, unspoken competition to out-spend each other on their offspring.
Parents taught their grammar-school children to distinguish Hondas from BMWs. High school kids knew which of their friends’ parents had the highest-paying jobs. Some of them felt proud to come to school wearing Rolex watches and Gucci shoes.
As our family CEO, K waged a war against this by having high expectations of our kids as students and as family members. She was strict with household rules and stingy with luxuries.
If our boys failed to maintain a B+ average, we didn’t allow them to go out. Period. Before they could play on weekends, they had to work around the house. And the work was real: cleaning toilets and cutting the lawn.
We had no live TV. Video games were verboten. We never bought them clothes or toys when they asked for them. They had to wait for their birthdays or Christmas. But most of all, we expected our kids to be respectful to us and to others.
In other words, they were part of the universe, not the center of it.
K’s approach worked. Our children were not spoiled. Although – I must admit – I had doubts at times. Once, a few hours before picking up his date for the junior prom, I found my eldest son polishing the vinyl seat of the vehicle he was driving to the event: his 20-year-old, rusted-out pick-up truck. (He bought it from his grandfather.) He worked away at it in good spirits, seemingly oblivious to the stuffing coming out of a large tear in the middle of the seat. I wondered if we had gone too far.
Now, I have no doubts.
The Inheritance Question
What about leaving your kids money after you die?
I have a friend who doesn’t speak to his siblings because of a dispute over the distribution of his mother’s belongings after she died.
I’ve heard my neighbor refer to her mother-in-law as a “selfish bitch” because, at 80, the woman remarried and began spending some of her money on her new husband. When my father left more of his property to two of his daughters because they were unmarried, it caused a resentment that lasted several years.
“Family fights among children after death occur in a large percentage of families,” Tim O’Sullivan, an estate planning and tax attorney, told U.S. News & World Report. “If the No.1 goal is to create family harmony, then the estate plan ought to be designed in a way that preserves it. It’s so sad to see what happens in these situations.”
The last thing a parent wants is for the money he leaves his children to become a source of discord. And yet, it happens all the time.
This is precisely why K and I always lied to our children.
Whenever the subject arose, we told them – in clear terms – they would “never inherit a nickel” from us. We said we intended to spend all our money before we died. If we couldn’t spend it all, we would give it to a charity. We told them that we expected them to earn their own money – that they weren’t entitled to any of ours.
And we meant it.
Well, we meant the part about expecting them to make their own money. But we lied about the inheritance. Of course we’re going to leave them our money – at least some significant part of it.
We lied because we were afraid that if they expected an inheritance, they might become less ambitious. And it seems to have worked. Our boys have grown into young men who work hard, pay their bills, and never ask us for money.
Another – Maybe Better – Approach
Meanwhile, my friend Bill and his wife, E, took a different approach. They avoided lying when their children were small by simply avoiding the topic of money. Talking about money – they taught their children – was gauche.
But then, as the children grew into adults, they began to talk frequently and openly about their money. In fact, they formed a legal structure designed to preserve the family’s intergenerational wealth.
In preparing the speech Bill asked me to give on “the challenge of intergenerational wealth,” I had a conversation with him about our different approaches. And it changed some of my thinking.
I told him what we had done and said that we were happy with the results. I also told him that now that my children were adults – and their characters were largely formed – I was having trouble not helping them.
And then we talked about the inheritance issue.
He was surprised to hear that our children still believed they would not inherit anything from us.
“How long do you intend to continue with this lie?” he asked.
“‘Til the bitter end,” I answered.
“So they will find out after you are gone that they have all this money,” he said. “Just like that?”
“And they won’t have had any guidance from you on how to manage that money… how to work together to preserve and grow it… how to use it productively?”
That hit me like a ton of bricks.
My kids knew how to work hard. They knew how to enjoy their lives. But I now realized that one day they would inherit many financial assets about which they knew nothing.
So K and I decided to have a family meeting. We made it a formal meeting and asked our family attorney to preside. At that meeting, we showed our three boys – for the very first time – the sum of our assets. And we told them that we intended for them to inherit some portion of that.
I am pleased to report that their first reaction was negative. “We don’t need your money,” they told us. “And we don’t want it.”
I told them that I was happy they felt that way. But like it or not, they were going to inherit a sum of money one day. And we had to start talking about what they would do with it.
Since then, we’ve had several more meetings. And those meetings are influenced by a publication and organization that Bill and his eldest son, Will, started. It’s called – appropriately – The Bonner Family Office (BFO).
One big idea that we borrowed from the BFO concerns the purpose of inherited wealth. Bill doesn’t believe in cutting up wealth among the children so that they can do with it what they like. He sees the wealth as an integral family asset that should function more like a bank.
Rather than inheriting lump sums of money, the children inherit an interest in the family fund. The purpose of that fund is to help individual family members enrich their lives… but how they do that must make sense.
Children can borrow from the fund. But if they do, they must return the borrowed money with interest. They can use the money to start businesses or pursue education, but they can’t use it to buy sports cars or yachts. They also should help the fund grow in value. That way, when they die, it’s larger than it was – large enough to help their own children.
As it happens, I had formed The Ford Family Limited Partnership 20 years prior to this, so we used that structure to accomplish these goals.
We’ve already used the partnership to extend two loans: one to help our eldest son buy a house and another to help our second son start a business. Without access to these funds, neither of them could have done those things.
Their credit may not be good enough for banks, but it is good enough for us. Having the limited partnership structure allows us to provide a financial benefit to them without spoiling them.
Another thing we’ve done is include our children in a charitable project I started in Nicaragua a number of years ago. It’s a community center that provides educational and recreational facilities for local people. Originally, I saw this as a personal project – my own experiment in charitable giving. But now, by inviting the family to get involved, I’ve benefited in two ways: I have their help in developing the center, and I can expect that it will be preserved after my death.
Our youngest son took over as director of the center two years ago. He’s done a great job of it, hiring capable people and vastly improving the scope and quality of services. He receives a stipend for doing this. In addition, he’s learning how to manage a somewhat complicated business with 20 employees and hundreds of “customers.” (He asks me questions and sometimes listens to my answers.)
The Ford Family Limited Partnership owns rental real estate, which seems to be the perfect vehicle for our purposes. And recently, our second son agreed to manage those properties. As a musician and composer, he had very little exposure to real estate investing or business management. But he’s taken to it like a duck to water.
He spends several hours each week learning about the real estate business, learning that – like the music business – it can be both fun and challenging. Like our youngest son, he receives compensation for his efforts. This gives us a way to help him out financially that is merited rather than entitled.
Our oldest son hasn’t gotten involved in any of the family businesses, but perhaps he will one day. If not, there’s always the chance that a cousin or grandchild might want to get involved.
We still have plenty of assets to figure out, but we are comfortable with what we have done so far.
The community center in Nicaragua is fast becoming a project we all feel proud to contribute to. And the real-estate business has already become a cool little private bank that can make loans to family members while it grows its asset base steadily and safely.
In general, I feel like we’re doing a smart thing: involving our children in the management of the assets that they will one day inherit while we are still around to provide advice and guidance.
So what have we learned about this complicated subject?
While your children are young…
Don’t buy them expensive things just because you were poor and never had them. Remember that giving your children less is sometimes giving them more.
Expect them to work – and not just at their education. Give them menial household chores and pay them fair market value for their work. Never overpay them.
Avoid discussions of family wealth. If the subject of inheritance comes up, tell them they aren’t getting anything.
When your children leave home…
Make it clear that their bedroom is no longer their bedroom. Put their personal effects in storage. Tell them they are welcome to come home for brief periods as a guest. Remind them that guests are always well-mannered.
When your children become adults…
After your children have proven to you that they can take care of themselves, you can begin to discuss family wealth, including what they might one day inherit.
Consider putting a business or some income-producing assets into a legal structure that can operate as a family bank, making loans to them when merited.
Consider establishing a family charity (if you believe in charity).
Use the family bank and charity to teach your adult children what you have learned about managing wealth.
[Ed Note: Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Palm Beach Letter. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.]