Opening the Kimono: How to Discuss Wealth with Your Children
By Randy Kaufman, with research assistance from Dustin Lowman
Many of my clients believe (and I concur) that their most valuable asset is not found on their net worth statement — it is the family itself. They rightly focus on that “human capital” even more carefully than on the money that pays the bills and supports philanthropic endeavors.
Yet in a world where we speak (and text, and post) freely about virtually everything, talk of money is often still taboo. I offer this advice:
Be upfront about the family wealth as early as possible, and extend trust and educational resources to your children. This will prepare them to deal with their futures, whatever that may mean in terms of expected wealth.
I understand the discomfort that makes people avoid the subject. Parents don’t want children to take the money for granted; children don’t want parents to think they’re looking forward to inheriting; family members may feel resentful about decisions; no one wants conflict. In fact, a survey conducted by market research firm Spectrum Millionaire Corner found that only 17 percent of affluent parents have shared or intend to share the details of their income or net worth with their children by the time they are adults. Another 18 percent said they never would. But, to this, I ask: Who has ever solved a problem by pretending it doesn’t exist?
Some parents think they can and should hide their wealth from their kids. It is often an attempt to provide their children with the (in some cases) middle-class upbringing that served them so well and made them so resilient. But in the world of Google, there is very little privacy, and keeping secrets very rarely bodes well for family dynamics.
As Ron Lieber, author of The Opposite of Spoiled: Raising Kids Who are Grounded, Generous, and Smart about Money, points out:
“Good parenting means talking about money with our kids much more often. When we avoid it, we lose a tremendous opportunity — not just to model important financial behaviors but also to imprint lessons about what we care about most.”
To build on Lieber’s sentiment, with which I heartily agree, I’ve gathered some thoughts and strategies that I have found to be effective when facilitating family discussions about money, values, and legacy.
The Kids are All Right
While kids may not know exactly what their parents make, they are observant. They notice what their peers have, where they live, and what their parents drive (or perhaps who drives them). As I mentioned, a quick Google search, which the average 10-year-old can do, can turn up a fairly accurate picture of a family’s financial position, even if their parents don’t frequent Page Six-covered charity functions.
Intentionally keeping this kind of information from your children, especially when they already have an inkling about it, is, at best, confusing. At worst, it may provoke a profound lack of trust. Years ago, I met a family who had a private jet they kept carefully hidden from their children, even at the cost of flying commercially when the children were with them. Imagine the children’s surprise, resentment, and perhaps even anger when the family brought out the jet for a medical emergency, and the truth was discovered.
I recommend creating an environment of communication about your family’s prosperity. Show the kids that you are fortunate to have your wealth and that it should be taken seriously. In other words, show the kids that you trust them. I call this “opening up the kimono” — that is, being financially transparent with your children. Imparting this knowledge should not be confused with relinquishing financial control — it is simply the first step toward open and honest communication. Whether they’re 15 or 50, this will help them prepare for the responsibility that such money affords them. I promise this isn’t as daunting as it sounds — read on!
A Bit of Carrot Can Go a Long Way
Many affluent parents fear that disclosing their wealth to their children will deter them from cultivating a sense of financial responsibility. I argue that the two do not have to be mutually exclusive — in fact, I believe they are symbiotic.
I once had a client who wanted to set up one $1M trust for his three kids. He asked me to meet with them and educate them. I told him that while I was happy to do this, I thought, in my humble opinion, it would be a huge waste of time. His kids would not care since it was “funny money” to them, beyond their reach. So, at my suggestion, he gave them each $50,000 outright and encouraged them to meet with me separately. This demonstrated that he trusted them and that he was willing to grant them independence, even if that meant making mistakes.
One child ended up establishing a successful business. The other invested in the markets with our firm’s guidance, and the third did lose the money. But in all cases, they were motivated, learned from their successes and failures, and, after a few years, were infinitely better-equipped to handle the large inheritances that would come their way.
For those families whose wealth is connected to a family foundation or enterprise, involving kids in various organizational roles throughout their lives is another way to encourage a healthy work ethic in the context of considerable wealth. I am proud to know and have worked with Amelia Renkert-Thomas, who, in her book Engaged Ownership: A Guide for Owners of Family Businesses, suggests inviting the kids to sit on the businesses’ Family Assemblies:
“Often, the owners of a family business will be older members of the family, with established leadership roles… The Family Assembly offers the opportunity to give the rising generation a way to participate…thereby building their leadership skills and helping to prepare them for other roles in the family-business system over time and giving the existing leadership a chance to see them in action and provide direction, mentorship and encouragement.”
Amelia’s work speaks to that “human capital” point with which I began this article. While I’ve had to remind a few clients over the years that their children are not their employees, and that family meetings should not be run like board meetings, there is much to be said for nurturing the next generation’s skillsets and encouraging their contributions to family enterprises from a young age.
Who Should Teach the Children to Drive?
Some parents may feel confident implementing these strategies without professional intervention, but in many cases, a financial advisor is a useful resource in helping educate the children so they can eventually manage the family wealth.
When I feel my clients’ children are prepared to handle a complete picture of the family wealth, I organize a family meeting to explain the balance sheet and estate plan and to set the stage for an ongoing dialogue. These meetings are most effective if an entire family and advisor team are present — lawyers, accountants, etc. Remember, passing knowledge to the next generation is not the same as giving them control of the money — the latter is earned over many years.
Over the course of my career, I’ve helped clients’ children in their twenties buy their first houses and deal with lawyers and mortgages for the very first time. I’ve provided clients’ high school-aged children foundational understandings of finance through targeted educational programs. I’ve advised on the simple (what funds to buy in a 401k) and the esoteric (how to set up a llama farm). (Okay, the llama farm did not end well, but it was a great educational experience for me, and for my client’s daughter.) In all cases, I’ve provided insights into present challenges and potential roadblocks, establishing methods of working with clients and their children over the years ahead.
Your Legacy is More than the Family Wealth
One of the most important conversations I encourage my clients to have with their children is about the legacy they want to leave, and how their money will contribute to it. Some clients opt to draft an “ethical will,” describing the experiences and values that they hope their heirs will consider in their legacy. Whether or not that is a fit for you, I’d encourage you to speak openly and honestly about your values, your mistakes and your successes, as well as your hopes and dreams for the future generations.
As always, if anything in this article sparked your interest, please don’t hesitate to reach out!
Click here to download a printable PDF of this article.