Planning Your Legacy: Rich Kids Can Feel Entitled. 7 Ways to Set Them Straight About Money.

Originally published by Cheryl Winokur Munk for Barron’s Advisor on July 8, 2024

Passing on the family wealth to children without also bestowing a sense of entitlement is a challenge for many affluent families. It can be a significant part of a financial advisor’s job to provide strategies and solutions to families in the hopes of avoiding the ill-effects of what’s known as affluenza.

Passing on the family wealth to children without also bestowing a sense of entitlement is a challenge for many affluent families. It can be a significant part of a financial advisor’s job to provide strategies and solutions to families in the hopes of avoiding the ill-effects of what’s known as affluenza.

“A lot of families don’t teach their kids about finances” and this creates headaches later on, says Jennifer Mann, a vice president in the Chicago office of Lenox Advisors. It’s important to train them when it comes to money—using tactics like a weekly or monthly allowance, instilling in them the importance of saving for long-term goals, and helping them to understand the difference between willy-nilly spending and spending with a purpose.

Otherwise, there are multiple problems that can crop up later on. For instance, young adults may feel aimless and possibly even depressed given their lack of purpose or goals. Or, when the parents die, it’s like winning the lottery, after which many people overspend because they have no structure or boundaries. “That’s how you blow through it pretty quickly,” Mann says.

Here are seven strategies for raising financially responsible children and mitigating the risk raising children with unhealthy—sometimes risky—attitudes toward money:

Teach your children how to manage money early. Wealthy families should try to avoid situations where their children have never learned how to manage money and suddenly receive a windfall. It isn’t advisable to “inherit $20 million and not know the difference between a stock and a bond,” says Amanda Regnier, a senior wealth strategist for CIBC Private Wealth in New York.

Although 69% of parents of adult children have talked with their children about family wealth plans, according to a recent study from the Bank of America Private Bank, that still leaves a host of families who haven’t. This raises the chances of missteps occurring, especially in cases of large wealth transfers where children haven’t been taught good money management practices.

“In an age-appropriate way, we need to talk to our kids about money, about investing, about budgeting and philanthropy—and communicate those habits,” Regnier says.

Involve your children in your estate plans. Nicholas Brown, managing partner at Granite Harbor Advisors in Houston, meets with his clients’ children, to help ease the disconnect that often exists between generations over issues such as taking over the family business and other expectations for how the family money should be used. “It’s almost like playing the role of family counselor to bring people together,” Brown says.

Once children are in their midteens, it’s advisable to start introducing them to the parents’ advisors, which can include an estate planning attorney, a financial advisor, and an accountant. 

“You don’t want them to first meet these people” after you die, Mann says. “If it lands on their lap with no exposure after Mom and Dad are dead and they can’t ask questions, that’s where it can be troublesome. It’s hard to build trust in that moment.”

Use trusts to enforce smart spending. Many affluent families use trusts, but they don’t always realize the flexibility they have to distribute funds through them, Brown says. 

The family could decide to limit the number of vehicles a beneficiary can purchase using trust assets. Another option could be to limit the value of a home purchased out of the trust to the average value for a particular ZIP Code. 

For families that are charitably inclined and want to encourage future giving, the trust could match qualified donations. Parents can “create incentives inside of the trust to allow for distributions” without allowing spending to go haywire, Brown says. 

Getting young people involved in philanthropy can also instill a sense of purpose that provides motivation to work hard and apply themselves, among other benefits. 

Make inheritance contingent on achievement. Parents often don’t make it clear to their children that they expect them to achieve basic milestones in life, even though they may not need to earn much money themselves. Parents should set clear expectations for receipt of money set aside in trust, such as graduating college or a trade school, or maintaining a minimum GPA. 

For some families, not having spendthrift children is really important. So, in that case, the parents might tie distributions from the trust to W2 or 1099 income that’s earned by a child. Such a strategy encourages self-sufficiency. At the very least, it requires the child to have some skin in the game for trust funds to be available.

“It doesn’t matter how much you get at the end of the rainbow, it’s that you can’t reach what’s at the end of the rainbow unless you meet specific provisions,” says Michelle Griffith, senior wealth advisor in the Chicago office of Citi Personal Wealth Management. 

Choose wisely when picking a trustee. Families often choose a family member as trustee, but having a corporate trustee can help mitigate issues that come up when children try to pressure the trustee to give them more money, Griffith says. This issue can be especially troublesome when distributions are left to a trustee’s discretion. Parents can consider naming a family member or friend who understands the family dynamics as co-trustee.

Be wary of Uniform Transfers to Minors Act (UTMA) accounts. Many people like UTMAs to save money for a child, partly because there are no annual contribution limits. However, if you are making large gifts and the account grows for 20 years, you could leave children with a windfall that they are unprepared to handle, Regnier says. “It’s something that sneaks up on a lot of our families.” 

Once the child gains legal access to an UTMA, there aren’t a lot of options for preventing the individual from blowing through it. Rather than use an UTMA, Regnier recommends families consider other potential options, such as putting the money in trust. “When your child is a newborn, it’s hard to predict how they’re going to handle money in their 20s,” Regnier says.

Don’t give too freely. Several years ago, Mann worked with a couple whose 20-something daughter and her husband hadn’t been taught about spending and budgeting. Through a trust fund allowance, the couple had enough for a down payment on an expensive home, but Mann felt the monthly payments wouldn’t be sustainable based on their lifestyle, which included travel and eating out. 

The young couple—who spent lavishly on home decorations—then asked for a larger allowance, and parents agreed. Mann feels this was a mistake because the children didn’t learn about the dangers of overspending. Parents “don’t realize that sometimes they’re hurting their kids that way too.”