Does Work Ethic Fade with Inheritance?

Will you leave your assets to your heirs? Do you worry if an inheritance will impact them negatively? This article discusses how to determine how much to leave loved ones, and if that money should come with strings attached.

Most people who have accumulated significant wealth over a lifetime of work, saving, and investing intend to leave a big chunk of that money to family members. But they may be conflicted about how much to leave and whether that money will negatively affect their beneficiaries.

This is the fourth installment in our series on managing intergenerational wealth. This column focuses on how to give that money away with the peace of mind that it will not be squandered.

The consulting firm Accenture estimates that about $30 trillion will be passed along to family members over the next few decades. A Merrill Lynch study from a few years ago found that two-thirds of its Private Banking clients worry that inherited wealth could detract from a child’s or grandchild’s work ethic. They are concerned their heirs may have an unhealthy sense of entitlement to their money and may not think or plan or work as hard as they did to build that wealth.

We have all heard stories of “trust fund kids” who live a good life without doing very much to earn it. There are even more stories of these kids squandering the money and ending up penniless.

It is, of course, our goal to improve the lives of those who receive an inheritance, not to rob them of ambition or stop them from achieving their potential. So how does one determine how much to leave their loved ones and if that money should come with strings attached?

How Large of an Inheritance Should You Leave?

The first decision — how much to leave — is a very personal one, partly because of different circumstances in each family. It’s important to consider how a significant inheritance will affect the life of the beneficiary and what you hope it can do for them.

Should An Inheritance Come with Terms?

The second decision – should there be strings attached – can be addressed using several strategies that reduce the odds that your money will be squandered or squash the ambition of your heirs. One popular method is to create trust accounts that tie the distribution of the money to the heir’s age. For instance, they might get one-third of their inheritance at 30, 40, and 50. You can also set up the trust to pay for specific events, such as college or a wedding. Trusts are useful in that they can establish rules and boundaries for how the money is used.

Tips for Creating Your Family Wealth Transfer Plan

When setting up intergenerational family wealth plans for clients (which includes a wealth transfer/inheritance plan), we ask several questions:

  • What are your goals and expectations in leaving your wealth to family members?
  • Do the recipients know how to live within their means?
  • Are they emotionally equipped to handle sudden wealth?
  • Do they have drug, alcohol, or gambling problems that could very easily lead to the money being squandered?
  • Do they have a significant amount of debt?
  • How strong is your child’s marriage?
  • Will your money be viewed as a “security blanket” for your heirs or will it represent a blank check?

The answers to some of these questions might raise red flags for you to consider, but others could give you peace of mind. For instance, if someone already has a strong work ethic, a dramatic change in wealth is unlikely to change their attitude and motivation. However, if they dread to work now, newfound wealth could make things worse.

You can pass along your values about work and money—as we discussed in our first article, Your Financial Values are an Important Part of Your Legacy—but as Richard Watts writes in his book, “Entitlemania,” “it takes about three days of grieving for your children to consider your inheritance all theirs.”

Unfortunately, there is no easy formula to help you gain clarity about how much is too much or too little. It involves lots of introspection, conversations with your heirs to gauge their mentality and readiness, and guidance from estate planning attorneys and trusted financial advisers. With the proper values, preparation, and structure, heirs can hopefully use their inheritance as a resource to create meaningful lives of their own.

We like the advice from Warren Buffett – father of three, investment guru and one of the richest men in the world — “Give your children enough money so they feel they can do anything, but not so much that they could do nothing.”

Read the rest of our series on Managing Intergenerational Family Wealth:

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