As published in the Racine Journal Times | January 3, 2013
Trillions of dollars are expected to be transferred in the coming decades from one generation to another. A common question I hear from older generations is: What’s the best way to leave their money to their children? An unlikely source of guidance for many of us is the second richest person in the U.S., Warren Buffett.
While only a few come close to amassing the financial wealth of Buffett, I think we can still learn a lot from his wisdom attributed to him in an interview he gave back in 1986 (when his net worth was a mere $1.5 billion — compared with $46 billion today). When asked what was the appropriate amount of money to leave his children, Buffett responded with, “Enough money so that they would feel they could do anything, but not so much that they could do nothing.”
A useful strategy we’ve used with repeated success is to make gifts to adult children while the parent is still alive and able see the impact on the child’s life. While the hope is that the expected outcome is positive, this is not always the case. Imagine money as a fuel which just speeds you along on your journey. If you were not headed in the right direction in the first place, money only gets you there faster.
Wouldn’t it be nice to see what direction your children are headed before leaving them a chunk of money at your death? After implementing this recommendation, we’ve seen several clients adjust their estate plans to add or remove restrictions based on the outcomes they’ve witnessed. Either they needed more restrictions on access to the money or realized they were being too controlling.
In 2013, the annual gift exclusion amount increases to $14,000 per person which allows you to gift this amount without worrying about gift taxes and IRS forms to file. Assuming you don’t need the money for your own needs, this may be worth considering if you have concerns or would like to start the transfer of wealth prior to your death.
Another strategy is to consider leaving some or all of the money to a cause or organization, which reduces or eliminates the issue of what your children will do with their inheritance. Buffett adopted this strategy himself by leaving the majority of his wealth to charity, believing that his children already have had more opportunity than most based on their childhood and educational experiences.
Besides experiences, can you guess the one thing we can all give to our children that Buffett believed to be the greatest advantage in life? Love.