Received at the right time, inherited wealth can be a significant blessing. It can provide financial freedom, allowing the younger generation to pursue their dreams, rather than being chained to a desk. However, the chequered history of wealthy families shows that wealth at a young age can in some cases be as much a burden as a benefit, robbing young adults of their ambition or pushing them into poor life choices. When is the right time?
Inheritance is a thorny business. Give too much and at the wrong time, you risk your hard-earned wealth being squandered by a younger generation not yet mature enough to handle it; hand over too little, you may risk family feuds and perhaps an unnecessary tax burden. In truth, there is no magic age for inheritance, and it may not always be under the donor’s control. However, there are a number of aspects worth considering.
Children’s attitude toward money is formed young, as early as five or six. This may be still too young to judge whether they will be a responsible steward of an inheritance, but as they grow up, looking at how they deal with their own money can help when formulating estate planning decisions. How do they deal with their finances? Do they spend or save?
Peer pressure will also be a factor. The biggest risk is that a child spends recklessly. There will be times in their life when this is more likely to be a factor. For example, if they have wealthy friends at school or university, they may be encouraged to spend money to keep up. By their mid-20s, they may have sufficient maturity to resist such pressure.
It is worth considering how you would have dealt with significant wealth at different stages in your own life. For better or worse, children often inherit the financial attitudes of their parents, so putting yourself in their shoes may point you to the right decisions.
Children often inherit the financial attitudes of their parents.
Impact of the inheritance
The early years of any career path can be rocky. Individuals will often be at the bottom of the pile, obliged to work hard, with little autonomy and enjoying relatively little reward. However, these early years can be a vital part of learning and building a career. With a big inheritance, is there any guarantee that heirs will make it through the challenging period?
Parents will need to weigh the advantages and disadvantages of children inheriting significant wealth before they are established in their career. It offers them an opt-out clause that could derail their professional progress. They may decide to travel, or take ‘early retirement’. They may never then realise the personal satisfaction and intellectual fulfilment of building a career. It may also put them significantly out of step with their peer group.
Wealth also confers responsibility. Significant wealth needs to be managed. Property wealth may require the child to manage tenants and arrange upkeep; investment portfolios can be managed by professionals, but the heir will still need to engage with them. Again, it is perfectly reasonable to expect a young adult in their mid-20s to take on this kind of responsibility, but more difficult for a person still in their late teens.
The amount of the inheritance may also influence the age at which it is given. A life-changing amount, one that enables the heir to quit work, buy property and live freely, makes for a far bigger decision than if they are simply inheriting the equivalent of a deposit on a house or a small portfolio of shares. Equally, squandering a small inheritance can provide a useful life lesson; the family is less likely to be sanguine about dissipating great wealth.
How should families prepare?
Whatever age you decide is the right one, you need to let children know what is happening. While some families might fear that this will colour their relationship with the child, it is better that they know what may happen, have met any key financial or other advisers, and understand what will be expected of them.
It is also a good idea to teach good money habits from an early age. Children who are taught the value of money, are used to conversations about it, and have responsibility for spending and saving from an early age, tend to show a better attitude to money as adults.
The right age
While the right age to inherit will vary from family to family, relatively few young adults are ready to inherit significant wealth before their mid-20s. Those looking to pass on their wealth, either before or after they die, should put mechanisms in place to deal with this. That is likely to involve some element of trust planning. It is possible to create trusts that deliver a series of disbursements based on age or life events – for example, to finance a first home, on marriage, or at the age of 35.
Pensions may also play a role in deferring the transfer of wealth – it is possible to make small contributions into a pension over time, which cannot be accessed until substantially later.
There will be a balance to be struck. Families will not want to create unnecessary complexity, but nor do they want to hand a child a substantial amount of wealth with no plans to help them deal with it. There will also be other considerations, such as taxation. It is a difficult decision, with significant risks of getting it wrong, and it needs to be approached in a collaborative spirit in which all parties are fully engaged.
“Parents will need to weigh the advantages and disadvantages of children inheriting significant wealth before they are established in their career. It offers them an opt-out clause that could derail their professional progress.”