Many people aim to leave behind as large an inheritance as possible for their children upon their death. The logic is very simple. After they die, the wealth (or whatever money and assets they owned) they pass on to their children could aid them significantly in many things. They could use it to invest, cover their existing loans, or just simply spending it however they want. Yet, not many think of giving the intended inheritance to their children while they are still living, perhaps due to the reluctance of admitting their death is near, or perhaps they are afraid that once they give everything to their children, they will no longer be useful and may even be abandoned. Such is human nature and such cases had happened before.
But giving the intended inheritance to the children while still being alive need not be a lump sum gift of everything you have. It can be given slowly and purposefully with the intention to build up the children’s lives. When I said purposefully, it means that for each sum of money or asset given, it has to be used in a practical way to build up their own lives or wealth, although at times it may be a for them to spend on their own pleasure, such as having a holiday or buying an expensive car.
There are a few reasons why we should pass on the inheritance money earlier on. But this article is not meant for you as a child, to tell your parents that. It could easily be seen as you being a greedy and unfilial son or daughter eyeing the parents’ money long before their death. It is for you, as a parent, to think and consider it through. Afterall, any decent parent would want the best for their children.
Many children, when they receive a lump sum gift of inheritance assets or money, do not know how to use it wisely. I have seen it with my own eyes their still living adult children squandering away what the dead had worked hard for their whole lives on entirely useless things, like a fanciful car. If the parents were alive, perhaps they would frown upon such behaviour, taking their hard earned money and throwing it on things which do not add value.
When people who do not have money management skills inherit a sum of money, they do not know how to manage it properly. All they know is either to park the money in the bank to collect dust, or to spend it on short term luxury items such as a car or an expensive holiday. This kind of spending may also be spread over a period such as buying a luxury bag this month, going for an expensive spa session the next, and so on. We have seen more than enough cases of poor people striking the lottery and winning many millions of dollars, only to become poor again a few years later. As parents, I believe most did not work hard their entire lives just to let their children splurge. I believe most of their intention is for their children to have a better life over in the long term, and if possible, to have a better life compared to theirs.
Since you know you cannot bring all that amount of money into the grave, there is no need for you to keep all that money till the day you die, regardless of whether the money involved is 10 million or just $500,000. We all know that the initial stage of wealth accumulation is very important. A person with an initial capital of $500,000 to play with is entirely different from a person who had to start from scratch at $0.
We do not want to spoil our children but want them to be independent, being able to take hardships and solve problems on their own. Afterall have already or will become adults one day, having their own families to take care of. Their shoulders should be able to carry the weight of a whole family and its problems. But the resources we provide them early on could be a great help to them and need not conflict with the direction of encouraging them to be independent. For example, if your child just got a spot in university, you may consider paying for his university education in full, while at the same time letting him work for his own accommodation and living expenses. In this way, he not only learnt to work to sustain his own life, but at the same time come out to society free from debt, giving him a headstart compared to his peers.
If some time down the road after graduation, he decided to buy a house but did not have enough money for a down payment, your gift of down payment money to him will aid greatly. Not only did he not need to rent anymore, but the mortgage he is paying every month (which is about the same as rental money) is actually going into paying for his own house rather than paying for other people’s (the landlord) house. He is still paying for the monthly mortgage, but your down payment has aided him greatly.
Given that the child is trying to lead a decent life rather than spending on harmful habits like drugs or gambling, and trying to build up his wealth rather than squandering it away on expensive holidays or fanciful cars, that initial capital you provide will make a lot of difference. We know that wealth gets compounded over time, but the initial stage has always been painfully slow. A person invested a million dollars will get $100,000 for a 10% return, but a person with only $1000 will get only a mere $100 for the same percentage returns. A millionaire will still have $999,000 after spending $1000 on basic needs, but a person with $10000 savings will see a 10% reduction in his overall wealth just by spending the same $1000 on daily necessities. The amount of money left for the poorer person to roll over will be much lesser in terms of percentage.
We always hear from people who said they tried many businesses but failed many times. They never gave up and kept trying, carving out a success for themselves at the end. While this kind of stories seem inspiring, the financial backing these people have is also a practical reason why they could keep trying. If they fail, they need not worry too much about debt or even about their savings being wiped out. Their family could support them when they had nothing or even give them the necessary capital to try again. The children could then learn from the lessons and have the opportunity to restart their business or investment adventure. Yet the average person cannot afford to do so. One failure in business could sink their whole family. There will be no one to pay their debts, no one to provide them with daily expenses should their savings get wiped out. The children need milk, the adults still need a roof over their head and food to eat. The clothes to wear, the bills to pay, the insurances to pay, the very fact we are existing in civilisation means everyday we need to fork out money. A failure for the commoner could cripple half their lives, making many fearful to venture out.
Yet, if a parent could provide sufficient support, the child could attempt new things. They could afford to fail. I am not saying parents need to dump a lot of money onto their children. But even if parents do not have the capital to support their children’s business, providing basic support at the back such as for living expenses and daily necessities as well as accomodation would also qualify as a sufficient backing should the children lost all their savings. Only when one’s basic necessities are met, could they be confident to go out and dare to try new things.
Take note that all of the above assumes that the children are people who legitimately wants to improve their lives. They may never make it rich, but even if they just want a simple normal life, providing them the appropriate support in accordance to their desire to improve and their capabilities will definitely make far more sense than hoarding it till the day you die. By then, your children would have lost the golden period in their lives where they could swiftly get their first pot of gold and compound it during their later years.
To add another point, inheritance money has tax in most countries. The tax rate is not low at all. In the US, it ranges from 10% to 20%. In South Korea, it is 50%. Of course, in certain countries the tax rate is 0%. By leaving it till your death, some of you are allowing the state to get a huge portion of your hard earned money. Surely you mean to give the money to your beloved children, not to the Government.
Give slowly and appropriately while at the same time leaving enough for your own needs. There is no need to give everything to your child early on. There is also no need to keep everything all the way.