31 May, 2021

Protecting Your Children From ‘Affluenza’ | IPC Wealth

Protecting Your Children From ‘Affluenza'

Imagine an affluent couple whose wealth is self-made after decades of hard work and disciplined financial planning. They have a child who’s 18. Now, the couple is giving serious thought to the handing down of wealth.

How much should we support our children financially over the next 10 years? Over the next 20 years? How large should we make the inheritance in the will? For many parents, answers to questions like these involve the issue of “affluenza.” The concern is that a child who receives great wealth with ease may also inherit a lack of drive and wander through life with a sense of entitlement.

There’s no magic solution, and certainly not one that works for every family. Not only do parents’ beliefs about how to share wealth come in all stripes, our children have varying degrees of motivation and financial responsibility. A lump-sum inheritance could be given to one adult child who mismanages the money and fails to realize personal success, while another child becomes the founder of a thriving business, a philanthropist, and a positive contributor to society.

Here are three-tiered approaches that show wealth distributed sparingly, generously, and gradually – all designed to avoid affluenza. As you read them, think (as objectively as possible) about which would suit your family best.

Limiting support

On the tough love end of the spectrum are affluent families who make the adult child work for almost every dollar in their bank account. No hand-outs, no affluenza. This approach requires solid communication and an understanding child – or you risk resentment. Exceptions may be made to help fund major life events like education, a wedding, and the down payment on a first home.

Giving generously

You may feel confident about being generous with family wealth if you’ve taught your children to manage money responsibly. Take university years as an example. You tighten the controls on the Bank of Mom and Dad so your son or daughter learns to budget and manages finances. After each school year, you encourage them to spend summers working or interning, not taking time off. Come graduation, while many peers pay off loans, your kids have learned the value of saving and investing.

Even with this approach, if affluenza is a concern, you may not wish to be overly generous. As American investor, business magnate, and philanthropist Warren Buffet famously said: “I believe in giving my kids enough so they can do anything, but not so much that they can do nothing.”

Sharing wealth gradually

If you give wealth in instalments over your lifetime, your child will have financial support to help achieve life goals without the possibility of misspending a large lump sum or losing motivation. And you can establish a testamentary trust to continue distributing assets in instalments over time after you pass away.

Ultimately, if affluenza may be an issue, you need to find an approach that’s true to your beliefs and suits your children’s degree of financial responsibility. We can work with you to find your opportunities while living, and leaving an inheritance through or outside of your estate.