From the September 2004 issue of Investment Advisor • Subscribe!

Heir Support

Some people are born to wealth; others have wealth thrust upon them. But both kinds worry about how to handle it with their kids.

Many of my wealthier clients' questions revolve around this issue. How should they educate their children about the family's affluence? How should they give them money? How can they leave an inheritance that doesn't take away the kids' initiative or turn them into spoiled brats?

Even if you haven't yet dealt with these dilemmas, chances are good that you will. Here are ideas on how to handle them.

A client couple tell me that their 16-year-old daughter shops constantly, buying designer clothes and accessories that are worn once (if at all). Although the parents are wealthy enough to afford a $450 tab for a pair of shoes, the casualness of her spending worries them. They're considering putting her on an allowance, but are afraid it may worsen her anorexic tendencies. Since they have never been comfortable discussing money with her, they have asked me to help.

First, incipient anorexia is a red flag. If your clients' daughter is not already being treated for this condition, they should act quickly to make sure she gets psychological care. Her eating disorder specialist may be able to suggest when and how to discuss the subject of spending limits with her.

Generally speaking, this will involve their sitting down with her at an unstressful time and place to address the taboo subject of money. To take the pressure off this young woman as the "identified patient" (that is, the one in the family with the "problem"), the parents should apologize for having neglected this important area of communication and training. If they wish, they can say that this realization came to them after talking with you.

They can then discuss the social pressure to keep up with one's peers and share their own struggles growing up with similar challenges. The tone throughout should be respectful and non-judgmental.

\Finally, the parents should say that everyone needs to set limits, regardless of their level of wealth. Reassuring her of their love, the parents can say that for their own peace of mind, they need to know that she can manage money well. They should ask for her views on an appropriate monthly spending level, and try to get her commitment to a sum they feel is reasonable.

I would also suggest that they encourage the daughter to keep records of her spending, so they can all regroup after a few months to see if the allowance is adequate. This will hopefully be the start of a dialogue between parents and daughter.

A recently widowed client has a large sum she wants to leave in trust for her two teenage children, but she is concerned that knowing about it will encourage them to be slackers. She is also debating whether to leave equal amounts to her 15-year-old daughter, who is exceptionally frugal, and her 17-year-old son, who has no money sense. What's the fair thing to do?

A good solution is an incentive trust. This would allow her to provide adequately for both children, with financial rewards for behavior and attitudes she favors. For example, the trust might be structured to match their contributions to charity, or to advance tuition money if a beneficiary pursues further education. Your client may also want the trust to provide extra income if they attain a certain net worth or, alternatively, if they enter an important but lower-paid career such as teaching or social work.

Before setting this up, she should have a serious talk about money with both kids. I would recommend that she applaud the daughter's thriftiness, but urge her not to deny herself all the immediate pleasures that can make life more enjoyable. She should also find something to praise about her son's behavior (perhaps his open-handedness with his friends?) and reveal her concern about his tendency to overspend.

She can tell them both that she intends to give them financial help and support in the future, but doesn't want them to stop trying to become well-educated, caring people doing meaningful, productive work. She might resolve her concern about her son's spendthrift tendencies by informing him that unless he controls his spending enough to save a certain sum by a certain date, his inheritance will be doled out in a much more controlled fashion.

Whichever way your client is leaning, she should allow ample time to discuss the matter with her kids--not only to be sure they understand her motivation, but also to let them contribute to her final decision.

My client was horrified when his only son, then 18, was expelled from private school. The boy dropped out of touch for two years, bumming around the Caribbean, Europe, and the Himalayas. Recently, my client got a request from him for the airfare to come home. Torn between hope that his son will finally amount to something and fear of further disappointment, he can't decide whether to advance the money. The boy's stepmother doesn't want to be involved in the decision.

This is a very difficult situation. My instinct tells me that your client needs to have a long, thoughtful talk with his son, preferably by phone (e-mail would be a weak second choice) to see what the boy plans to do next. If his son just wants a ticket back to the U.S. so he can keep wandering aimlessly, your client should refuse.

On the other hand, he might voluntarily offer more funds (a loan, not a gift) if his son is interested in becoming a responsible member of society. These funds might be earmarked strictly for finishing his education, buying a car, starting a job, etc.

This request for money could also be an opportunity for rapprochement between the son and his father. Your client might consider making the gift of airfare contingent upon the son's participating in a short series of family therapy sessions with him. These sessions can help repair and strengthen a relationship shaken by years of distance, disappointment, and probably mutual hurt.

Should kids be told that their family is wealthy? If so, when and how? The clients who have asked me this question have soft-pedaled the issue so far with their 7-year-old twins. Should they keep pretending they're just a middle-class family?

There are two views on the matter of family wealth. One says to hide it from the kids, so they don't grow up feeling that they'll be taken care of for the rest of their lives. The other advocates telling them the truth as soon as they can understand it, and helping them learn to handle money in a way that creates a life they can be proud of.

I agree that it can be dangerous to let children think they will be forever taken care of without having to lift a finger. At heart, however, I am a proponent of the second view. When people are kept ignorant, they don't have a chance to grow.

It might be useful for your clients to communicate to their kids something along the lines of "Our family is blessed to have more money than some other families around us, and here is what we plan to do with it."

If the parents are worried about wealth spoiling their children, they can tell them (when the kids are old enough to understand) that they do not intend to give all or even most of it to them. Even if they change their minds later, they will have demolished the children's expectation that money will shield them from having to create a life of their own around work, volunteering, and other meaningful activities.

My clients' 25-year-old daughter has a large trust fund from her grandparents. Since graduating from college, she has traveled around with other wealthy kids, taking an occasional job such as tending bar in St. Tropez and generally living high on the hog. Her parents are impatient for her to "find herself" and get a real life. Her trustee, who is her uncle, has discretionary authority to withhold her allowance. My clients are wondering if they should request it in order to force her to settle down.

In your place, I would encourage your clients to proceed more slowly and communicate much more fully before taking such a drastic step.

They need to get together with their daughter first, if necessary motivating her by mentioning the possibility that the cash flow from her trust fund may soon dry up. Face to face if possible, or by phone, letters, or e-mail otherwise, they can initiate a dialogue about what the daughter needs to do, and pronto, to avoid being cut off.

If she asks what right they have to interfere in her life, I think the answer is that they care about her. As her parents, they feel genuine concern that her trust fund is enabling her to live in a way she may later regret. She is 25, not 18--and the sooner she gets a grip on real life, the better.

When clients ask me how to teach their young kids the value of money, what should I say?

One of the most important things you can suggest is a consistent weekly allowance. This should start as soon as the child is able to count and handle money. I usually recommend that the allowance not be tied to particular chores or behavior, but some parents feel that linking an allowance to small tasks helps teach the value of work. In either case, the children can be offered extra money as a reward for chores above and beyond what they are normally expected to do.

The money they receive should be divided into three jars: the first for spending (the child decides what to spend it on), the second for savings, and the third for charitable giving (the child picks the charity). Parents can also show their kids how to pay bills, how electronic banking works, and how taxes are paid. Children can be included in comparison-shopping expeditions, or in discussions about which charities most merit a contribution. Being open about your finances will help them understand the value of money as well.

When clients worry that their wealth may disempower their kids, empathize with this very valid concern. Brainstorm ways they can support their children without fostering a sense of entitlement that will isolate the kids from others and from meaningful activity. Most of all, encourage them to communicate with their children about money. Talking about wealth isn't tacky, and shouldn't be embarrassing. On the contrary, it's crucial!

By assisting clients with this thorny issue, you can help improve their comfort level and their kids' financial savvy--benefits that may keep paying off, year after year.

Olivia Mellan, a speaker, coach, and consultant therapist, is the author with Sherry Christie of The Advisor's Guide to Money Psychology, available through the IA Bookstore at www.investmentadvisor.com. E-mail Olivia at om@moneyharmony.com.

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