Annual gifting can push kids into financial dependence, Edwards-Pitt warns.

How to help ultra-high-net-worth families avoid committing ultra-high-priced mistakes that blow their wealth — “shirtsleeves-to-shirtsleeves” — in just three generations? Guide them to raise children who will be productive, financially self-sufficient and independent. So says Coventry Edwards-Pitt, partner and chief wealth advisory officer at Ballentine Partners, in an interview with ThinkAdvisor.

The CFP and CFA specializes in helping super-wealthy families deal with the impact of wealth — especially on offspring.

“Yes, there’s wealth here, but we hope you never need it. We encourage you to be productive in your own life” is the values-themed message such parents should drive home to children, according to Edwards-Pitt, author the popular “Raised Healthy, Wealthy & Wise” (Amazon Digital Services, 2014) and the new “Aged Healthy, Wealthy & Wise” (BP Books, Oct. 2017).

There’s a host of ways FAs can help well-to-do clients transfer assets to the next generation — but some of the usual ones can do more harm than good, says Edwards-Pitt, 41, who began her career at Goldman Sachs evaluating money managers.

Raised middle class by her divorced single-breadwinner mom, a lawyer, she joined Ballentine in 2004. The firm’s assets under advisement total $11 billion, of which $6.9 billion is under management. With 189 clients, Ballentine maintains two high-net-worth practices, one for clients with $3 million to $20 million in investable assets and a family office for those with $20 million or more.  Average account size of the latter: $50 million to $100 million.

One big blunder moneyed parents make, Edwards-Pitt says, is telling children how much the family is worth without encouraging them to be productive and earn on their own. Annual gifting, especially at kids’ formative 20-something stage, is another “don’t” since that can easily lead a child to slip into financial dependence.

To be sure, instilling a work ethic and setting spending limits to hold kids accountable are universal issues, but they are more pronounced in families with great wealth, partly because these parents have big hang-ups about discussing money with their children in the first place.

ThinkAdvisor recently chatted with Edwards-Pitt, on the phone from her office in Waltham, Massachusetts. For “Aged Healthy, Wealthy and Wise,” she interviewed well-heeled elders engaged in life and inspiring. Her previous book was the product of interviews with 24 inheritors who developed successful lives on their own – despite having tidy family wealth. Here are highlights of our conversation:

In working with clients, is passing down family wealth through many generations one main objective?

That’s talking exclusively about whether the wealth will survive. I see this as a much larger issue: Whether every generation will have the chance to be productive, self-actualized human beings because the presence of wealth can impair the next generation’s ability to lead a grounded life filled with pride in their own achievements.

You write that children are better off when they’re uncertain about when they’ll inherit and how much they’ll receive. Why?

As advisors, we may unintentionally be doing harm if we recommend sharing wealth information if that isn’t going to help a child be productive. However, that information can be shared effectively if the right narrative is put around it: “Yes, there is money here. But it’s not for you to use now. You are encouraged to be productive.” But typically that’s not the full narrative that’s used.

Why is that harmful?

Because then the kids are confused as to whether they’re expected to develop financial self-sufficiency. Parents add to that confusion by providing annual gifts or other financial transfers that don’t meet the need for kids to develop that self-sufficiency.

You write that the typical industry attitude is that there should be family discussions about wealth transfer. But you stress: Don’t have them when the kids are in their 20s. Why not?

That’s a really critical period for development — the time when kids develop their own identity, form their own careers and life partnerships, and separate to a certain degree from the family unit.

So where does any conflict arise?

By that time, parents in their 50s and 60s want to see their wealth used in their children’s lives: How can I make my child’s life easier? So they start to [initiate] wealth transfer to them. That typically doesn’t help the child as they’re embarking on that critical identify formation because it can loop them into what can be a very dependent cycle.

What about parents who, around that time, try to interest the children in philanthropy, such as involving them with a family foundation?

If the kids haven’t developed critical life skills, like earning their own money or having a career, that often doesn’t work in the way parents hope. I see kids becoming philanthropic on their own once they have families and are trying to pass values down to their own children.

Wealthy parents siphoning off money on a long-term basis to a child, who perhaps isn’t making it on their own, can lead to codependency: the child feels entitled and the parents are more than willing to give them money. That doesn’t seem constructive.

It’s rare that the child will ask for the first transfer of money. But the parent thinks: “I have all this wealth. How can I make my child’s life easier?” and offers to pay for something. At first, it’s appreciated, and then it becomes baked into their life.

What’s the repercussion?

Over the years, it’s harder for the parent to back off. And you throw in the emotional relationship between the parents and child, especially if the parents are going through a version of empty-nest feelings. If the kid phones, it’s sad but understandable that many parents are happy for that call even if it’s just asking for money. They know that if they say, “No,” and stick with it, they won’t get a call anymore; or if they do, it will be a call of anger.

Can this occur even if the kids aren’t exactly “kids”?

Yes. For example, parents in their 80s can have still-dependent children who are in their 30s or 40s. At that stage of life, the parents just want family harmony. So the larger goal of trying to change the child’s behavior to enable them to be more productive and independent is subsumed by the more immediate goal of simply wanting to maintain harmony.

You write that children of great wealth can be “dependent, childlike, bitter and frustrated” but that parents have no idea what they’re doing wrong regarding money. They think, “How can I better express my love than by sharing my wealth with my children?”

Most people who are parenting with wealth haven’t come from wealth. Some have even come from deprivation. Those parents, especially, are at risk for giving too much to their children because they want them never to feel like they did. So to them, there’s no higher use for their wealth than to remove the chance that their children will feel deprived.

What has to happen to make wealth transfer work well?

There needs to be clear expectations on both sides and a clear framework. For example, if the money is for education: For how long? What’s the expectation of what that figure will be? What will be required in terms of financial independence after the degree [is earned]?

Please talk more about the need to enforce financial limits.

Some parents sign their children up for financial-literacy training classes. Those skills are very useful; but to be effective, this training needs to exist surrounded by a much larger conversation about values.

Embracing what?

That valuing character is more important than money; the difference between a necessary purchase and a discretionary one; how to become accountable for money that you’ve spent [etc.].

Why is that conversation difficult for wealthy parents?

In their situation, the natural limitation of financial scarcity isn’t present. So they have to [create] a limit and say, for example, “We’ll pay for middle-of-the-road jeans for you. But if you really want the super-nice ones you say you do, you can find a way to earn the money to get them yourself.”

Yet, you write that the taboo about discussing finances is even more prevalent in very affluent families. Why is that?

Parents feel that any discussion of money could open a can of worms that would require them to divulge more information about their wealth than they want to. That is, by bringing up a financial topic, they might end up in a conversation they don’t want to have, like, how much their house is worth or their income.

What’s wrong with talking about those things with their children?

The parents have a couple of fears. One, they’re worried that if the children understand their degree of wealth, it will demotivate them.  So they lack a good understanding of how to talk about that in age-appropriate and developmentally appropriate ways. They’re afraid to be the ones to “let the cat out of the bag.” And part of that concern is about privacy.

What could be the fallout from telling the children how much money the family has?

The child may assume that being surrounded by wealth growing up will continue to be their life [style]. That’s a dangerous assumption. It’s far better for parents to say, “Yes, all of this wealth is here, but let’s talk about what role it will play in your life. Just because it’s here doesn’t mean it’s not important for you to learn how to be self-sufficient in your own life. That is our goal for you.”

Why is it a major mistake not to be open with the children about the degree of wealth?

It’s much better when parents overtly address the reality of the situation because the kids “get” it anyway. They know. They can look up house values on [real estate site] Zillow, and they’re told by their friends that they’re wealthy. It’s much better for the parents to be honest and [tell them]. But they also need to take that next step and discuss what that means in terms of the child’s life.

What is exactly the best thing to say?

This works fairly well: “Yes, there’s wealth here, but we hope you never need it. We encourage you to be productive in your own life.” So they acknowledge the good fortune but then move to Stage 2, which is putting the emphasis on the child’s own life and productivity.

But how, in a practical way, can parents avoid demotivating their children?

Create opportunities all through childhood for the kids to develop a work ethic and learn to live within financial limits. For example, putting them on a budget so that when they bump up against that limit, the parents can say, “No, this should be a perfect amount to live on. If you’d like more, there are lots of opportunities for you to earn money.” And that should be encouraged.

How can parents prevent siblings from fighting over their inheritances?

One way to completely remove that chance is to have communicated the “why” behind their estate planning decisions. When siblings fight [after parents’ death], most of the time it’s because of confusion about why Dad or Mom did it that way: “Why did they give this to you and not me?”

When and how should parents supply the “why” information?

If kids are mature enough in their own lives, communicate it directly. Have a family meeting so everyone hears the same thing, or write it down so there can’t be confusion with people claiming they heard [something different] in a one-on-one conversation with the parent.

What’s another advantage of having such a meeting?

Parents can ask the children: “What do you think of my plans? Let’s talk about it now — I don’t want anybody to be surprised. I want to feel you’re all going to get along with one another after my passing.”

When that time comes, what if one or more siblings feel gypped as a result of the way the wealth division is stipulated?

Most trusts these days are written in such a way that they can’t be changed. That said, I like when a trust puts a lot of empowerment into the hands of the beneficiaries. They can help the advisor and help manage the trust. The more you can empower each generation to feel like they’re accountable, the better it is. I prefer a trust structure allowing for that versus one that codifies the next generation and makes them feel forever the subordinate child.

— Related on ThinkAdvisor: