Clients often ask us about transferring wealth to the next generation. Sometimes those questions involve strategies for minimizing taxes and maximizing how much can be passed to heirs. Sometimes the questions center around structures for inherited wealth—trusts and specific trust provisions, including ages for distributions and the role of trust protectors. Frequently the top concern of our clients is how to give their children assets while ensuring they have a healthy relationship with money throughout their lifetimes. A large part of that concern involves preparing children, not just to inherit wealth, but to be financially literate—capable of managing their own affairs and savvy enough to know when someone is trying to take advantage of them.
Financial literacy encompasses several areas, some that coincide with various phases of life—from budgeting and investing to insurance, retirement planning, and ultimately estate planning. To start your children on this path and prepare them for the wealth that is to come their way, we recommend starting early with basic budgeting. As soon as a child is old enough to start asking for items they see in stores, that child is probably old enough for an allowance—a golden opportunity to introduce financial concepts.
Through an allowance, you can teach a child that some income must be
set aside as savings (we recommend at least 20%). You can also stipulate that some must be set aside for a charity of the child’s choosing. What is left over can be spent. This is also an excellent time to teach children the value of working (taking on small jobs or chores to earn extra money) and saving to purchase larger-ticket items. We recommend against advances and borrowing—delayed gratification is an extremely important lesson and will likely lead to your child valuing their purchase more than if it was acquired immediately. Not advancing funds also teaches your child to avoid debt—a concept that can be introduced later.
For older children, particularly the social-media and technologically advanced generation, several terrific apps can help them develop a more sophisticated budgeting system. This can be particularly effective when teens get their first jobs. Mint, YNAB (You Need A Budget), Tiller, and Pocketguard are some are some great applications that can integrate with a savings account to help your child manage their income, savings, and spending.
Coincidental with their first job, investing can be introduced. We recommend starting with an account
value between several hundred and a few thousand dollars. To give your next-gen some skin in the game, a threshold can be set at which funds can be withdrawn—for example, for every 20% the account appreciates, 5% can be withdrawn.
Since money can often be a difficult subject to discuss, this can be an excellent time to introduce a financial mentor—an adult friend or relative your child can discuss financial matters with. This mentor can help the child select investments, discuss what might be affecting their value, and discuss what the child’s plans are for distributed funds. As for investments, we recommend a mix of individual stocks—public companies your next-gen knows and is interested in—and index funds that offer broad diversification. While introducing the concept of budgeting at a young age can instill solid habits for how to think about income early on, introducing investing can serve as a gateway to broader economic topics as well as teach the value of compounding growth.
Finally, a financial mentor can serve to guide the child, helping them learn from both financial mistakes and successes with the goal of making good financial choices. Overlaying this education, parents can relate the values and hard work that went into creating the family’s wealth, setting the stage for future discussions of what their children will inherit. This, in turn, can lead to further discussions of parents’
intentions in transferring wealth, their children’s goals and objectives for their futures, and how the two can work in harmony.
Manchester Capital Management is happy to work with all family members to help guide them on a path to ongoing financial success. As always, contact your wealth manager for further information.
This material is solely for informational purposes and shall not constitute a recommendation or offer to sell or a solicitation to buy securities. The opinions expressed herein represent the current, good faith views of the author at the time of publication and are provided for limited purposes, are not definitive investment advice, and should not be relied on as such. The information presented herein has been developed internally and/or obtained from sources believed to be reliable; however, neither the author nor Manchester Capital Management guarantee the accuracy, adequacy or completeness of such information.
Predictions, opinions, and other information contained in this article are subject to change continually and without notice of any kind and may no longer be true after any date indicated. Any forward-looking predictions or statements speak only as of the date they are made, and the author and Manchester Capital assume no duty to and do not undertake to update forward-looking predictions or statements. Forward-looking predictions or statements are subject to numerous assumptions, risks and uncertainties, which change over time. Actual results could differ materially from those anticipated in forward- looking predictions or statements. As with any investment, there is the risk of loss.
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