Clients often ask, “When is the right time to talk with my children about wealth?” Truth be told, there is no one right answer to this question. Many parents are uncomfortable sharing information about their wealth with their children out of fear that such knowledge may stifle a child’s ambition or willingness to work, concern that children will share this information with others, or simply because they don’t know how to best broach the topic. However, it’s important to remember that the better you prepare clients’ children for the wealth they will one day inherit, the greater the likelihood that they will have the skills, education and values to appropriately manage the wealth for themselves and future generations.
In starting this conversation with the children, consider CIBC Private Wealth’s three guiding principles for discussing wealth with the next generation:
• Provide age-appropriate transparency;
• Create a learning environment; and
• Encourage opportunities for involvement.
Principle 1: Provide Age-Appropriate Transparency
Children may know more about their parents’ wealth than you think. Kids today are clever and can find out things about their parents’ wealth on the internet. Many items that indicate wealth—for example, the value of the parents’ home, their job title/position, the company they work for, the gifts they give or vacations they take—can often be valued or monetized online. Even younger children can recognize their relative wealth based on the size of their home, the schools they attend or the benefits available to them. Accordingly, providing age-appropriate transparency can help put their wealth into perspective and begin conversations about what it means to earn and maintain wealth.
Age-appropriate transparency does not necessarily mean sharing financial statements with children—unless clients want to. Instead, transparency is more about providing guidance for how to think about wealth and how it is earned and maintained. When the time is right, it is also about educating family members on their estate plan and their expectations and wishes for how the money will be used.
One way to begin this conversation is to discuss the type of work and discipline required to support the family and the family’s lifestyle. This discussion can be a great primer, even for younger children, to understand what it might require to sustain or build a child’s own wealth.
As children start to gain more independence, their parents can explain what they expect to provide in terms of financial support and discuss what they expect their children to contribute themselves. This type of discussion can provide important insights about future expectations. Consider how your clients would answer the following questions as a starting point:
• Is a child’s allowance contingent on them helping around the house?
• Is the child expected to work in high school or college?
• Are there any expectations about the child’s grades or other contributions if their parents are paying school tuition?
• Will any support be provided once the child is no longer living at home and, if so, are there any requirements to receive this support?
When the time is right, your clients can start talking with their children about their estate plan. This will give them new opportunities to discuss their values about wealth preservation and communicate expectations for how the wealth should be used. If they also plan to name a child as an executor or trustee (or co-fiduciary), these conversations can be critical to helping the child make important decisions related to these positions.
Principle 2: Create A Learning Environment
To prepare children for wealth, advisors and parents should find opportunities to create a learning environment where the kids can be taught about financial planning essentials and investment fundamentals. Consider the following ideas:
For younger children: Having money in hand is a good way for children to begin a financial education, whether it’s received through gifts, an allowance or the neighborhood lemonade stand. Talk to them about what they can do with this money, and introduce the idea of savings.
• Encourage children to save a regular amount of their money in their piggy bank, because it helps them develop financial discipline.
• Incorporate the “rule of three” by asking the children to divide money into three categories: savings (for longer-term goals, like a new bicycle), spending (for short-term wants, like a toy) and giving (for someone in need or a contribution to a local cause).
For middle and high school-aged children: At this stage, children will have interests that become more expensive. Whether it’s electronics, musical instruments, movies or concerts, children will likely be spending more and looking for financial support.
• Begin talking about the ways parents will (and will not) support their spending and introduce tools, such as a budgeting app, to help them learn responsible spending and money management.
• Introduce the basics of investing and finding real-world opportunities. For example, have the kids set up their own brokerage accounts and pick investments to get a jump start on their financial literacy.
For college-aged children and young adults: As young adults, the clients’ children will likely have many financial questions that arise as they navigate living independently, starting internships or jobs, paying taxes, and so on. This is a great time to introduce the children to advisors who can help them navigate the often confusing world of W-2s, 401(k)s, mortgages and investments.
For adult children: No matter how old the children are, there are always opportunities for learning and growth.
• The parents should consider sharing lessons about their own financial successes and failures. What do they wish they had done differently? What were their biggest financial successes and failures? These discussions might prove very helpful to children who have more life experience and can appreciate parents’ insights.
• As children marry and have families of their own, they may need more help thinking about their own long-term financial planning and support of their families. This is where transparency about family wealth and plans for that wealth can help your clients’ children devise their own financial and estate plans.
Principle 3: Encourage Opportunities For Involvement
This last principle is to involve the children in financial decisions that demonstrate family values and foster cooperation among the children and even younger generations. The involvement can come in many different forms:
• If the family regularly gives to charity, consider allocating a yearly amount for the younger generations to decide together which charities or causes to support.
• If parents hold an annual family meeting, consider having the children and grandchildren participate in all or part of the meeting.
• Set aside some funds (small or large) and ask family members to offer suggestions for investment opportunities that are aligned with the family’s expressed values. If your clients have not previously had a conversation about their values, this exercise can open the door to that discussion.
Beth Mayfield is a senior wealth strategist for CIBC Private Wealth Management in Atlanta, with more than 25 years of industry experience.
Caroline McKay is a senior wealth strategist with CIBC Private Wealth’s Boston office, and has 15 years of industry experience.