It seems that often children from families of relative wealth are insulated from the realities of money. Financial decisions are made behind closed doors, the children are given credit cards or a certain amount of money to spend on such things as clothing and entertainment, and the things that the children need or want are simply provided to them. As a result, children can grow up knowing very little about money. Like most of us take electricity for granted, for some children in wealthy families money is simply there. As a consequence, they are ill-prepared for dealing with the realities of financial life as adults.
One way to begin to address this issue is to create real-world consequences that flow from decisions about money. Some families will set up accounts or trusts that the children must invest to produce some tangible results in the world. For example, parents might say that they would put up sufficient money to buy their child a used compact for their first car, but then set aside an account holding that money or more and have the child work with an investment adviser to have the money grow. The children would receive the capital gains and income from their investment choices and would be able to add that money to whatever funds the parents were willing to provide for the used car. This way the children begin to understand that their investment decisions have real-world consequences and it brings home in very tangible ways the importance of investment risk, diversification, wealth accumulation, taxes, and other financial considerations. The important part to this process is allowing the child to experience either success or failure without intervening.
A philanthropic twist on this concept might involve the use of a charitable lead trust. In this sort of vehicle, the income generated by the investments goes to charity for some period of years. At the end of the trust term, the remainder goes to heirs. In setting up the trust, the donor receives a sizable tax deduction. When set up properly, these trusts can be sinking funds where principal will likely be depleted to make the payments to charity. However, with skillful investments, principal can grow faster than the payout rate and the remainder beneficiaries can do quite well for having paid attention to the investments. These sorts of philanthropic trusts can also serve as gateways for children to become involved in the organizations themselves. When properly structured, they will learn how the charity operates as a business, how it makes decisions, how its board of directors functions, how committees work, what staff do, what market pressures the organization faces, how the finances work and so on. By the time the children have experienced this first hand for a number of years, they will have gained invaluable knowledge about business operations that direct applies to both profit and non-profit organizations. The children will also have made significant social connections that directly contribute to their social capital. They will have established a network of adults who will help them find jobs, make other social connections, advance their careers, and so on.
Questions
- Have you seen clients use genuine and real consequences in helping their children learn how to deal with wealth?
- If so, what techniques have you seen it seemed to work?