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Financial and Psycological implications of inheriting or giving millions to heir

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  • Financial and Psycological implications of inheriting or giving millions to heir

    I recently inherited roughly $2 million dollars.

    This is not entirely academic to me. I’m ten years older than you and have a much higher net worth, but also just received a very large inheritance which more than doubled my net worth. I’m really having to think about the implications of this, financially and psychologically.

     

    These posts provoked some thoughts. I am curious to know the effects of receiving or giving away large sums of money to heirs. Most people think of large inheritance as a large house or $250K in cash / stocks. But being high earners, physicians can have wealth accumulation in the millions which they might not be able to spend by the time they are six feet under or burnt to a crisp. I know there are some ultra high net worth people here. So how are they planning to give it to their heirs ( not counting money to charity). And to the inheritors, How do you feel about suddenly getting $1-2M inheritance.

    I had free education which probably in today's dollars is worth $250-500K. No other inheritance. But thanks to some lucky investing I may have to give away $2+M to my heirs, even after giving a good chunk to charity. I am curious to know from those large inheritors how they felt when they received the money and do they plan to give such large amounts to their children.

  • #2
    i'm also curious.  it is very likely my children will be receiving large inheritances and since we started late, it might be earlier than they are ready for.  however, i am equally impressed by all the people on this site who want to retire early.  does it make a difference if you retire early because you earned it versus inheriting it?  money spends the same.  however, myself being the proband, i would like my kids to pass on more to their kids than i gave them, if only through the power of compound interest.  it is statistically unlikely they will make as much as my wife and i have been blessed to make.

    i'm pretty sure if i inherited 2 million$ i wouldn't retire any different.  i'm pretty sure if i inherited 10 million$, i wouldn't retire different but i would be forced to hire out financial help more than i am currently doing.  luckily since i support my parents (now parent) and my inlaws, it would be a bit of a surprise to have a major inheritance.  however, my dear mother, bless her heart, is taking the money i give her and buying life insurance with it because she has determined that one of her last acts will be to leave something behind.  so there will be something, maybe not as impressive in $$$ amounts as some here but equally from the heart.  

    thanks for the thought provoking post

    Comment


    • #3
      I think this is a great question to provoke thought, especially among physicians who are in a position to leave their heirs with a very substantial inheritance.

      One of the best ways to approach this situation came from one of my colleagues, Ray Lyne. He is fond of saying, "Let's pass wisdom before wealth."

      What he is stressing is that, as parents and grandparents, we are obligated to prepare the next generation(s) for the wealth they will inherit. Without passing wisdom before wealth, what was meant to be a blessing to our loved ones, can become a curse.

      Good estate planning is not only about identifying heirs and doing the planning required to transfer wealth. It's also about investing in those relationships while we are living. As Kamban pointed out, his sole inheritance was a free education. But, we can also invest in our heirs to help develop character and qualities that will prepare them for their inheritance.

      We should also begin to get our heirs involved our charitable endeavors. Teaching them generosity will help make sure they realize how fortunate they are and teach them not to take their wealth for granted.

      I have several physician clients who use Donor Advised Funds for just this purpose. They are able to sequester an amount of money for their children or grandchildren to decide how it should be donated. This gets their heirs engaged in thinking about what causes they are passionate about.

      I look forward to hearing the thoughts of others about this topic.

      Comment


      • #4
        Thoughtful post.  I am struggling to decide how much to leave several nieces and nephews versus charities.  I also struggle with should the inheritances be equal.

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        • #5
          while we donate quite a bit to charity, i feel like that is a very personal decision.

          i would not favor forcing charitable giving on my kids to teach them how fortunate we are.  there are many ways to accomplish that.  i hope they will be charitable some day, but they certainly is up to them and i would never think less of someone if they chose not to donate time or money to charities.

          i go up and down on equal inheritances.  i think ultimately it won't be totally equal, but substantial to each.  hopefully they understand and don't think too badly of me.

           

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          • #6


            while we donate quite a bit to charity, i feel like that is a very personal decision.
            Click to expand...


            Same here. I give a certain amount for charity and teach my child on charity, both monetary and physical volunteering. But I would like them to make their decisions on how much they would like to charity, to who and when.

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            • #7
              WCI had an  article about his kid's inheritance - and I def agree w him that money is much more useful when you're younger vs older in life.

              Having no student loans is huge. Getting some help for a wedding and a jump start onto life. I don't think money itself spoils kids/adults tho - it's how they are taught to use it that will ultimately matter.

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              • #8
                Yes charity is one aspect of our legacy, and then there is the inheritance conundrum.  Every child is different.  And in some ways they are a product of their upbringing, but at the same time very unique in their financial intelligence.

                One of my young adult children is focused on doing work that is meaningful to her and to society.  She makes a 6-figure salary but money doesn't mean much to her.  I wonder if it is because she has always been in circumstances of having more than she could ever need.  She is in her 20's and maxes her retirement funds, has a substantial taxable investment account and an overly large savings account (maybe she is thinking about a future home purchase).  I feel she could handle a large inheritance and invest it wisely, perhaps using some of it to purchase a home or build a business or something similarly productive.

                Our other child is in his early 20's, on a slow, intermittent path to finishing college (at an Ivy League institution no less), doesn't have much saved, works and saves for a while, then goes out and splurges.  At the moment, I don't think he is mature enough to handle a significant inheritance.

                Despite their differences, we feel strongly that it is important to treat our children equally.  Any other plan could cause a loss of harmony in their own sibling relationship.  That is the last legacy we would want to leave.

                We currently have specified equal shares, 1/4 of inheritance at age 30, 1/2 at 35, and the remainder at 40.  The thought is that our daughter doesn't really need it, and if our son screws it up at age 30, he gets another shot at age 35.  At the same time, both my wife and I are in excellent health.  Perhaps one or both of us will be around for many decades.

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                • #9
                  I find that in most successions where the decedent is very wealthy, the legatees are usually also wealthy, or at least well-to-do.  So inheriting $1M or $10M or $100M isn't really life changing.

                  Generally speaking, whenever there is a situation where a particular child can't handle the money, the parents usually have some sort of spendthrift testamentary trust.  And then of course the same with minor children or grandchildren who are too young.

                  Also keep in mind that unless you have one legatee, your estate is getting divvied up.  If you leave that $2M to your four kids, that's only $500k each to a kid.  Definitely a lot of money, but hardly life changing for a child who is probably in his or her 50s or 60s at this point and has been living a fiscally responsible lifestyle like his parents.  It certainly might help them retire a couple of years sooner or spend more on their own children.

                  Most of the clients I see divide bequests equally among their children, usually equally by branch.  It's pretty rare to have a client have an unequal division among children, and in those cases it's typically because they're trying to equalize for some large gift they made one child during life, they have one special needs child or grandchild, or they're writing a kid off altogether.

                  It's pretty rare for me to see large portions of an estate bequeathed to charity unless there are no children.  Generally, when there are kids, it feels like people are more generous during their lives than at death.  They might give millions away during life, but what remains in their estate at death goes to their children.  In my years of practice, I've only had one very wealthy client with children write a will leaving a large portion of his money to charity.

                  When there are no kids, wills tend to get a little more interesting, with clients tending to be much more willing to pick favorites among siblings, nieces, nephews and friends, and much more willing to make large charitable bequests.

                  Comment


                  • #10




                    I find that in most successions where the decedent is very wealthy, the legatees are usually also wealthy, or at least well-to-do.  So inheriting $1M or $10M or $100M isn’t really life changing.

                    Generally speaking, whenever there is a situation where a particular child can’t handle the money, the parents usually have some sort of spendthrift testamentary trust.  And then of course the same with minor children or grandchildren who are too young.

                    Also keep in mind that unless you have one legatee, your estate is getting divvied up.  If you leave that $2M to your four kids, that’s only $500k each to a kid.  Definitely a lot of money, but hardly life changing for a child who is probably in his or her 50s or 60s at this point and has been living a fiscally responsible lifestyle like his parents.  It certainly might help them retire a couple of years sooner or spend more on their own children.

                    Most of the clients I see divide bequests equally among their children, usually equally by branch.  It’s pretty rare to have a client have an unequal division among children, and in those cases it’s typically because they’re trying to equalize for some large gift they made one child during life, they have one special needs child or grandchild, or they’re writing a kid off altogether.

                    It’s pretty rare for me to see large portions of an estate bequeathed to charity unless there are no children.  Generally, when there are kids, it feels like people are more generous during their lives than at death.  They might give millions away during life, but what remains in their estate at death goes to their children.  In my years of practice, I’ve only had one very wealthy client with children write a will leaving a large portion of his money to charity.

                    When there are no kids, wills tend to get a little more interesting, with clients tending to be much more willing to pick favorites among siblings, nieces, nephews and friends, and much more willing to make large charitable bequests.
                    Click to expand...


                    are you able to comment on tax rates for trusts and whether it would be better to establish 529 for grandchildren than leave money in trusts for parents who won't get them until 30, 35, 40?   i'm also aware that the parents might otherwise need the money and grandchildren might qualify for financial aid, depending on various scenarios.

                    like white beard, our current will has different amounts being received at different ages.  we debated on that for a while too, since the younger child is five years younger and may feel some resentment that he doesn't get a 'windfall' at the same time as his older sibling.  hopefully we live long enough that this isn't an issue, but there is a definite chance one or both will be gone.  my wife worries if she goes, that i will get married to someone else and everything will be spent by some gold digger, regardless of what the wills say.

                    i'm prone to overthinking things, so my apologies in advance.

                     

                    Comment


                    • #11
                      One of my family members is doing something I think is pretty smart.

                      He's wealthy but not insanely so, ~$5M net worth around 60 years old. Couldn't burn through that if he tried.

                      He is gifting to his kids right now (mid late 20s, both exceedingly responsible and career driven) but stipulating that basically of the money has to be put in retirement accounts (and he checks to verify).

                      So they are getting quite large amounts of money each year but aren't "seeing it" in a way that they can blow. Sure it frees up some other money but I think it nicely avoids the trust fund kid issues (not that these kids would have those). The way he put it to me is that he is "securing their retirement."

                      My FIL supplemented my wife's income early in career so that she was able to max out her 401k all through residency. So again he wasn't handing her gobs of money to blow but saying "if you max out your retirement account I'll make your monthly cash flow look like you didnt." Finished residency w/ like $90k in retirement!

                      My plan to is to pay all reasonable educational expenses and do something like this if I can.

                      Comment


                      • #12




                        One of my family members is doing something I think is pretty smart.

                        He’s wealthy but not insanely so, ~$5M net worth around 60 years old. Couldn’t burn through that if he tried.

                        He is gifting to his kids right now (mid late 20s, both exceedingly responsible and career driven) but stipulating that basically of the money has to be put in retirement accounts (and he checks to verify).

                        So they are getting quite large amounts of money each year but aren’t “seeing it” in a way that they can blow. Sure it frees up some other money but I think it nicely avoids the trust fund kid issues (not that these kids would have those). The way he put it to me is that he is “securing their retirement.”

                        My FIL supplemented my wife’s income early in career so that she was able to max out her 401k all through residency. So again he wasn’t handing her gobs of money to blow but saying “if you max out your retirement account I’ll make your monthly cash flow look like you didnt.” Finished residency w/ like $90k in retirement!

                        My plan to is to pay all reasonable educational expenses and do something like this if I can.
                        Click to expand...


                        forgive my ignorance, is it better to max out retirement or avoid student loans, if you have to pick between the two?

                         

                        Comment


                        • #13
                          I feel like a lot of my concerns with giving a child $1M outright would be reduced if instead the money were put in a trust and they received $30k/year inflation adjusted for the rest of their life.  The corpus of the trust could then benefit grandchildren, charities, etc.  By doing this, they would never have access to a large enough sum of money at once for them to act on any really stupid impulses.  It would not be so much money that they could take a pass on living a responsible adult life (education, work, etc).

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                          • #14




                            I feel like a lot of my concerns with giving a child $1M outright would be reduced if instead the money were put in a trust and they received $30k/year inflation adjusted for the rest of their life.  The corpus of the trust could then benefit grandchildren, charities, etc.  By doing this, they would never have access to a large enough sum of money at once for them to act on any really stupid impulses.  It would not be so much money that they could take a pass on living a responsible adult life (education, work, etc).
                            Click to expand...


                            it was my (extremely limited) understanding that trusts are not tax favorable.  also, when we looked at the issue, we thought we were not wealthy enough that we should keep the money from them past age 45 ish.  we believe that trusts are considered in financial aid deliberations, even if the person has no access to the money.

                            i really hope someone more knowledgeable than me posts something.  

                             

                            Comment


                            • #15
                              If you do not leave money to your decedents in trust, the money becomes part of their taxable estate, and is at risk to spouses and creditors. I believe income from a trust that is passed through directly retains its character, ie, long term capital gains remain taxed at the long term capital gains tax rate. In contrast income retained by a trust and distributed after the fact is taxed at trust tax rates, which are indeed very unfavorable. But I'm not a CPA or tax lawyer. This is a lay understanding.

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