Today’s guest post tackles a sensitive question in estate planning: when to disburse an inheritance to heirs. The post is courtesy of Mark Goodfield, a professional accountant who writes the The Blunt Bean Counter Blog. Mark covers accounting, tax and wealth management issues on his blog and if you haven’t checked out his site, please do so. It is excellent. Now, over to Mark…

I am often engaged to provide estate planning. Many people born to the “silent generation” have amassed great wealth; a 2006 Decima Research study estimated that over one trillion dollars in wealth could be transferred between 2006-2026. After twenty-five years of discussions regarding the distribution of wealth, it is my opinion, that where an estate will clearly have excess funds when the parents pass away, that the excess wealth should be transferred in partial gifts during a parent’s lifetime.

It is my observation from these meetings that people form four distinct groups: those that will take their wealth to their grave (or leave it to their pet Chihuahua), those that will distribute their wealth only upon their death, those that may not be able to afford their grave (as they give and give to their children) and the most common, the middle ground of the extremes, those who are willing to distribute their wealth, but in many cases harbour concerns their wealth will be “blown” or lead to unmotivated children.

In this blog, understanding my opinions may be diametrically opposed to some readers, I will talk about these varied groups.

For those who wish to take their wealth to the grave, there is often a deep rooted family issue, and the chill in the room makes it very clear that advisors should stay clear of delving into these family issues.

In the case of those who wish to distribute their wealth upon their death, the issue is typically philosophical. That is, one or both of the parents feel that their children need to make their own way in the world and that leaving them money during their lifetime will do their children a disservice or destroy their moral compass. This is a touchy area, but I often suggest that if the parents feel their children are well-adjusted, they should consider providing partial inheritances. A partial inheritance can facilitate a child’s dream, such as climbing Mt. Kilimanjaro while the child is physically able, or assist with the down payment on a cottage. The selling point on partial distributions is that the parents can share vicariously in the joy of the experience they facilitate.

In the third situation, the parents spend every spare nickel on their children’s private school, dance lessons, hockey teams, etc., while younger and then assist in buying houses, cars, etc., when their children are older, to the detriment of their own retirement, let alone the distribution of their wealth. In these cases I suggest the parents pare back the funds they spend on their children and/or make the children contribute to their own activities. It is imperative the parents impart upon their children that they are not an ATM and that there are family budgetary limits to be adhered to, often easier said than done.

The majority of families fall into the last category. They are willing to distribute their “excess” wealth while alive, but in many cases harbour concerns their wealth will be “blown” or lead to unmotivated children. Dr. Lee Hausner, an advisor to some of the wealthiest families in the United States, suggests in various articles of hers that I have read, that parents do not transfer money during career-building years so the children learn to be productive members of society. Children should be taught they have choices to make (ie: distribute money for one thing they want but not three things they want) and they should learn to be philanthropic amongst other things. I think this advice stands on its own whether you are one of the wealthiest families in the United States or just a family that has been lucky enough to accumulate more assets then you will ever require.

How one distributes their wealth is an extremely private issue and each individual has their own thoughts and reasons for their actions. However, in my opinion, where the parents have the financial wherewithal, they should consider making at least partial gifts during their lifetime.

Update: Mark posted a follow-up article on his blog discussing the lessons everyday Canadian families can learn from estate planning tips for wealthy families.

This article has 16 comments

  1. One of my observations on this issue is the desire of grandparents to leave money to the grandchildren, effectively, but not necessarily, skipping a generation, their own offspring. Circumstances vary of course, but in my opinion, this is a mistake. Is this fair to the parents of the grandkids? Does it set the grandkids up for a trust fund entitlement? No and yes.
    I like the idea of grandparents helping to fund the education of their grandchildren, especially if they can get directly engaged (go see the school, watch sports, etc). Parents can use the help financially and kids need education.

  2. CC, thanks for posting this blog. Many people never imagined they would have this issue; however, for various reasons, typically real estate values exploding, they suddenly will have to consider these issues.

  3. @David: Grandparents helping fund the education of grandchildren sounds like a fine idea. I wonder if there is a potential pitfall: if there are four siblings and they each have 4, 2, 1 and 0 kids, the sibling without any dependents may resent that others have received more inheritance than they did.

    @The Blunt Bean Counter: Thanks for the post Mark. I look forward to reading the follow-on post.

  4. The entire subject is often the source of a lot of arguments between family members which can result in lawsuits in extreme cases. I think for that reason, most people try to avoid the subject.

    My parents informed me that they chose me as the executor of their last will and testament. Personally, I don’t look forward to that role and hope my parents outlive me. Luckily, all of us in the family are quite self-sufficient, so nobody “needs” the inheritance, per se.

  5. One observation I’ve made about the inheritances in my family and my wife’s family is that the money is often transferred to children who are themselves past retirement age. In this case there is little concern about destroying the motivation to succeed in life.

  6. My folks were young parents so i wouldn’t expect to see an inheritance (if any) until my late 50s at least, when i won’t need it at all. A lot of us are in the same boat. So i hope they spend, and enjoy, every penny. I have no kids so it’s to the cats and dogs home for whatever i leave!

  7. Michael, your experience is the reason for my blog in the first place. If there are excess funds to distribute with certainty (I am not talking about a distribution where it is unclear the parents have enough to live- I am talking about where there are enough funds even after leaving a buffer) then transferring funds after the children are already at retirement age, essentially means in many cases, those children cannot utilize the funds as they may have wished 10-15 years before due to health etc. and the inheritance for all intents and purposes is an inheritance to the grandchildren.

    Madra, I agree, most of us hope our parents spend, and enjoy, they worked for it, but what about when they have more than they will ever spend? Would you not prefer your inheritance now or in the near future if those are funds you will receive when you are 50 anyways?

  8. My parents helped me financially in 2 very important ways:
    1. They taught me to live within my means, and
    2. They helped me out financially at a few important points in my life (e.g., first downpayment).

    We’re doing the same with our kids. As you said in your post, it’s nice to be part of the experience when you help your kids financially.

  9. When it comes to inheritances, being an only child(like me) has it advantages.

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  12. “For those who wish to take their wealth to the grave, there is often a deep rooted family issue, and the chill in the room makes it very clear that advisors should stay clear of delving into these family issues.”

    I don’t agree. As an “advisor” it is your duty to advise your client. Keeping your mouth shut and taking money from your clients in service fees or commission on products is exactly why a great many wills end up being contested these days. What you are if you choose not to ask the though questions is a yes man who will in the end do more harm than good. This I’ve seen with my own two eyes and know that it is happening on a daily basis in Toronto (and I imagine through out the country).

    Tell your client to be fair and equitable otherwise tell them to spend the lions share while they live as any other scenario, the money is more likely to end up at one of the many law firms specializing in this throughout the city.

    That’s my two cents, but it comes from experience so you would do well to heed it.

  13. @Phil: I suppose you could look at the glass as being half full by being the chosen executor. A friend of mine, who’s relative had passed away found out that they were among 3 executors listed in a will and the situation was a complete mess. The estate literally took years to sort out. Based on what I heard, I wouldn’t wish a scenario like that to sort out on my worst enemy.

    @Mark: Nice post

    From my perspective, I am in the process of finalizing my last will and testament and I have a close relative listed as executor. As morbid as it may seem, If my wife and I pass away early, our executor will be there with financial assistance for our kid(s) but under no uncertain terms do we want our kids to inherit an immediate large sum of money (either through life insurance or accumulated wealth) – especially at an early age.

    Our objective is to be around with our kids of course, and to be there to assist in education and as they get older (30s onward) and as time goes by, proceed with partial inheritances to help them along the way. For example, if one of our kids gets married, we may help with a down payment on a house or a deposit on a big purchase item. We want our kids to learn the value of a dollar and work for their living but at the same time, they need to know we are there with them along the way.

    In my view, it is easy to rip the motivation out of a kid’s soul by always giving them things when they need it. I remember mowing lawns at 12 year of age so I could go out and by a new stereo or base ball caps and so forth.

    I think this is a very subjective area of discussion, and many people view estate planning from different perspectives. I tend to lean more towards partial inheritances but a lot of this will depend on the circumstances that are present when my kid(s) are older.

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  15. Timely article, reality is that most Assets are invested with the current holders timeline, they should be invested with the Heirs timeline.
    How do you distribute wealth if some of your children are still alive, others not, do Children of deceased siblings share equally with siblings that are still alive?
    Do you leave equally or reward those who have not done well and punish those who have, according to need or according to deed?

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