One of the most frequently asked questions by my clients as we discuss their planning, is “How much money should we leave to our children?” Most parents want to make sure that their children or grandchildren are protected from the many uncertainties of life, but many have witnessed that leaving too much money outright or easily accessible to children can actually create bigger problems for them. A good question to ask might be “Will the date of my death be the date of my children’s retirement?” Is this something that you would really want? In talking through the different stages of your children’s and grandchildren’s lives, I like to use what I call the Bucket Theory.
Picture the following stages of life as “buckets of time”. How much would you need and want to place into each bucket to cover the expenses related to this time period when you are no longer around?
Birth to 18 – This is the time of life when your children or grandchildren are most dependent upon your for the true essentials of life – room and board, education (public, private, special needs), a family vacation each year to continue ties with other family members, music lessons, athletic activities, etc. If something were to happen to you or your children’s primary caregivers during this time period you would want to ensure that enough funds were set aside, and properly managed on their behalf, to cover their basic needs.
College Years – The cost of attending college extends well beyond the direct payments made to a college, university or technical school. Again, room and board come in to play, as well as travel expenses to and from school and medical and other insurance coverage during this time. How about technology needs or labs expenses? What if your child or grandchild has the opportunity to study abroad or to except an internship in another state? Do you want to put constraints on the funds (i.e. limit the number of years you would pay for undergraduate studies) or encourage extended studies (masters, doctorate programs)?
Launching Pad Years – There is often a period of time following graduation from college when a young adult still needs some support from their parents. Parents often rejoice when their new graduate receives their first job offer in a big city, then realize that the cost of rent and living expenses in these venues can quickly devour their child’s paycheck. Would having some funds set aside to help offset these initial expenses help the child as they establish their career? Allowing the child to focus on their new work, without the stress of wondering how they will cover their costs may be of great help. Warning: a small stipend versus an over abundant one will provide some incentive to make good choices – perhaps finding a roommate would help, setting reasonable expectations on where they can live initially, or working harder for that first promotion?
Marriage/First Home/First Business: In the natural progression of life, children may progress toward wanting to own their own home – whether with a spouse, or alone, or perhaps taking what they have learned and starting their own business. Would you want to provide for a down payment for these? Do you have support systems in place (supportive, experienced trustees) who can help guide them through these processes? If marriage is in the picture there is clearly expenses that would need to be covered. Would you also want to specify funds to help pay for the honeymoon or a special gift?
Incentive – At any or all of these stages, funds can be used to help incent your loved ones to make good choices. Many clients have expressed this by telling me that “they want their children to get up every day and do what they love”. This is often the subject of discussion in families where they have talented children who have chosen to become musicians or art teacher, versus doctors, lawyers or businessmen. This can often become a point of contention when you begin speaking of the family “adventurer or ski instructor”. Creativity is a welcomed ally here as we have seen “incentive trusts” allowing the various children to “match their current salary up to a certain level”, thereby allowing the art teacher to continue to do what they love, and providing them a bit extra to supplement their needs. But remember, “fair” is not always “equal”. Incentive language in trusts is also effective with students, who are encouraged to set their standards high, in hopes of a reward for their efforts.
Special Needs Situations - It is not uncommon for clients to have family members who simply need additional help due to a disability. Special planning should be considered so that funds are used to supplement any potential aid they are receiving, and enhance the quality of their life. Even families who do not have a known special needs situation should discuss how they would want things handled if an unforeseen event might occur – accident, medical incident causing disability. A related topic would be how to help a loved one facing an addiction problem. Would you want to cover the expenses related to rehabilitative options – how many times?
Healthcare – with health care costs continuing to be one of the most expensive buckets to fill, more clients are making specific mention of them in documents. Would you want your funds to help cover family healthcare insurance costs, or supplemental policy costs (cancer coverage, long term disability, etc.). How about experimental medical procedures? Honestly, so much to consider.
Continuing family connections – Many people have special times (annual family vacation) or places (summer cottage) that they want their family to continue to have or enjoy after they are gone. Family traditions are paramount for them in discussing their family legacy. The logistics of these are often delegated to a family member or family committee to handle. If possible, it is nice to have a member from each generation work on them together so there is continuity and buy in from each level. Leaving funds to help cover the costs for travel may encourage participation.
Lifestyle – In my opinion, this should be the last topic of conversation during the planning process. Over and above your children’s needs for health, education, and other basic needs of support, how much do you want to enhance their lifestyle? Over the years my mantra has been to focus on the TOOLS your family needs to be successful over the long run, not the TOYS. I am a firm believer in empowerment versus entitlement. Are you empowering each of your family members or loved ones to achieve their goals and dreams?
Bottom line, how do you want to foster success in the next generation, and what is your definition of success? If you take the time to consider all of the buckets and how you would want to fill them, you should feel confident that you are placing the proper focus on your financial resources.
About Caldwell Trust Company
Caldwell Trust Company is an independent trust company with offices in Venice and Sarasota, Florida. Established in 1993, the firm currently manages over $800 million in assets for clients throughout the United States. The company offers a full range of fiduciary services to individuals, including services as trustee, custodian, investment adviser, financial manager and personal representative. Additionally, Caldwell manages 401(k) and 403(b) qualified retirement plans for employers.
