Before I dive in and start discussing generational wealth and the dilemmas that come with it, let’s first define what generational wealth even means.
I read a piece on Market Watch and they defined “generational wealth” as follows:
“By definition, generational wealth represents assets passed down from one generation to the next. If you can leave behind a notable inheritance to your descendants, that constitutes generational wealth. These assets can include real estate, stock market investments, a business, or anything else which contains monetary value. “
As this blog is mainly about pursuing FI with kids, I think generational wealth is quite an important topic for us to discuss. We are all pursuing FI and some of us also have kids, which we care about.
I will not be talking about inheritance tax (or any other tax planning) today and this post is not going to be number-heavy at all. I want to discuss two main topics/questions/dilemmas with you.
The first one is- when should parents (if at all) gift money to their kids? While they’re young and need it most? Or perhaps after the parents pass away?
As generational wealth can be passed on in different ways and times, it is something worth thinking about.
This is the topic we’ll discuss today.
The second one is your approach to gifts, are they ok/acceptable or are they “cheating” and unfair?
This topic is discussed in Generational wealth – part 2: Receiving gifts.
By the way, I use the term “child” and “parent” a lot throughout this post but “child” can mean a 30 or even 60-year-old.
Let’s start with today’s topic.
Generational wealth- When should parents (if at all) gift money to their kids?
Should parents path their wealth to the next generation? If so, when?
I think there are four main approaches here.
First approach- gift at death
I think that traditionally, most of the parents’ money gets passed to the next generation as part of the parents’ estate. In simple terms, the child(ren) will get the money as an inheritance. That’s the traditional approach
One pro is that the parent has the least financial risk here. If the parent becomes ill and or needs a large sum of money in their later years (for any reason), it would be a shame if that money was gifted to the kids earlier. The parent has control over the money, they can live their life to the fullest and if anything remains, the children can enjoy it.
As a child of my parents, I quite like this approach. My parents raised me and my siblings well (subjectively of course). We can all take care of ourselves. Looking at it from the child’s perspective, I rather they enjoy their money while they’re alive (which I hope is many many years).
Another pro is that most times, the “child” will be much more mature and ready to handle large sums of money. As life expectancy increases, the children will be much older when they receive their inheritance. On one hand, that’s an age where you’re mature enough to handle the money. However, this is a con too.
As I said, the last pro is also a con too. Usually (you’d hope), people are already financially stable by the time their parents pass away and don’t really need the money as bad as in their early adulthood. Yes, it can help and improve their lives, but I think that receiving that money in your early adulthood would help a lot more. In “early adulthood” I mean the beginning of your career, when you purchase your first home, and/or when you start a family. Of course, there are outliers and people who purchase their first home in their teens or in their 50s but I hope you understand what I mean.
The other con, which is why (I think) most parents gift money before their death, is an emotional reason. The parent wants to see their child enjoy the money and how much it helped. The fact that this is an emotional reason doesn’t mean it isn’t legitimate. Just to clarify, from the parent side, I completely understand and even agree with it. From the child’s side? I discuss this in Generational wealth – part 2: Receiving gifts.
Second approach- gift while the child is young
This is kind of the opposite of the first approach. That is why the cons from the first approach will be pros here and vice versa. For that reason, I’ll try and keep it short.
The biggest pro, in my opinion, is that the child gets the money when they need it the most. In your late 20s or early 30s, you’re probably starting a family and buying your first property. With your salary still growing (hasn’t peaked yet), a mortgage and childcare costs, money could be an issue. Some parents recognise that and prefer gifting money (or property or any other asset) at that age for exactly that reason.
The other pro, as discussed above, is that the parent is alive and around to see the benefit and joy their gifts bring.
In the book “The millionaire next door” (highly recommended), the authors show how adults who receive regular monetary gifts from their parents earn, on average, less than those who don’t receive monetary gifts. They become dependent on those gifts and may not fulfil their full potential. I get it, if you have regular money coming in or even knowing that someone will bail you out if needed, reduces your hunger/drive. I don’t know about you, but that makes sense to me.
I’m not even going to discuss gifts in the child’s teens (except for, maybe, university tuition). I think that most (not all) teenagers are not mentally mature enough to deal with large amounts of money.
Third approach- a mix
Traditionally, most of the generational wealth passes on at the death of the parent. However, that does not mean the parent can’t help the children out beforehand as well. This can be with money for university tuition, a wedding, a downpayment for a property, or any other reason. These gifts are usually given for a specific purpose and are rarely a case of “Her’s a few thousands of pounds, enjoy my darling”.
Both my parents and Lazy FI Mum’s parents took this approach and I think we will as well.
I think this approach gets the best from both worlds.
The child gets the money when they need it the most, as a young adult. The parent gets to see their child enjoy and benefit from the gift and most importantly, it removes the “maturity” question.
When a parent gifts their child a cash gift, they can do whatever they want with it. Here, the money is marked for a specific purpose. The most common “purposes” are usually university tuition, a wedding (covering part or all of the costs of it), and/or a downpayment for a property.
While this approach is a mix, it also keeps most of the cons from the first and second approaches.
If we go back to the conclusions from “The millionaire next door”, this approach may be considered the worst. Not only do the children know that the biggest expenses of their lives (university tuition, wedding, and buying a property) are (fully or partly) covered, they also know that retirement is less of an issue as they will probably inherit a nice amount when they’re around 50-60 years old.
Side note about inheritance and what I’m assuming
I want to stop for a second before I continue and clarify a few things.
I can only hope that most people, like me, never want to receive their inheritance money and rather have their parents around.
Another assumption I’m making here is that the parents are quite well off financially. If the parents are struggling financially or aren’t sure they have enough money for retirement, I hope they will keep the money for as long as they live and trust that they raised self-sufficient kids. This whole post is about parents who have enough money for themselves and then some.
OK, let’s move on to the last approach.
Fourth approach- no or little generational wealth to be passed on
In this approach, the parents don’t pass on all the generational wealth to their kids (even when they pass away). The parents can choose to use all or most of their money on themselves (see P.Y.L. below) or give it to charity when they pass away.
This approach has a whole philosophy around it.
One pro is that you will raise less-spoiled kids as they will have to make it on their own. That is consistent with the conclusion from “The millionaire next door”. It is more common with very rich people and celebrities.
You can read about a few celebrities doing it and the reasons behind it:
Shaquille O’Neal– “We ain’t rich, I’m rich”
Gordon Ramsey – includes other parenting “gems” from the famous chef
Some of these people do it to avoid the kids being spoiled, I think Gordon Ramsey and Shaq fall into this category.
However, I suspect the billionaires do it for another reason and it’s about equality.
The question behind their decision not to pass generational wealth to their kids is “why should one kid have such an advantage over another just for being born the ‘right’ family?”
I must admit I find the “equality” angle hard to relate to (yes, I’m a white European man, super privileged etc.). While I understand not passing on billions (maybe too much?), passing nothing seems a bit too harsh. Why would you rather give money to charity than to your own kids?
Yes, I know the charities “need it more”, I really get that. However, some starving kids need your food more than your kids. While in an ideal world, each child should be treated the same, we are not wired that way biologically. We are wired to prefer our children and family over strangers. It’s why we, as humans, group up in relationships, families or tribes.
Another thing is that if you are very wealthy and get your child used to a certain lifestyle that they won’t be able to afford later, is that being fair to the child? I think Gordon Ramsey addressed that question by making his kids sit in economy class while he’s chilling in first-class, fair play to him.
Another angle on the fourth approach (no or litlle generational to be passed on)
There is a movement in Israel called “P.Y.L- Pachot Yerusha Layeladim”. It means “less inheritance for the kids”. It encourages people to enjoy life, put themselves first and spend their money. P.Y.L assumes the (adult) children can take care of themselves.
Based on this approach, you also leave very little to your kids but here, instead of leaving it to charity, you spend it on yourself.
The child’s perspective
Until now, we discussed the parent’s perspective. We looked at different times (and reasons) to pass (or not) generational wealth to your kids.
Now, I want to ask you a different question. Take off your parent hat and put on your child hat instead.
When would you rather receive the money (if it were up to you)?
I can tell you that I don’t include any inheritance in my models or plans. It is money that I never want to receive (because of what must happen for me to receive it). I also hope it will happen in the very fat future
I prefer my parents to use their money to enjoy themselves.
As the son, I hope my parents take the P.Y.L approach, at least partially. People usually work very hard for 30, 40, or even 50 years (those not pursuing FIRE). Why shouldn’t they enjoy it and make all their dreams come true? Go for it. However, I am afraid that some of the risks from the YOLO (You Only Live Once) apply here too.
If you aim to spend every single pound you have, you may live longer than expected and run out of money. I hope people pursuing this approach have some safety buffer or emergency fund, which can then be passed on to their children or to charity.
However, my parents chose the mixed approach. While they didn’t pay for my tuition, they did help us pay for our wedding and our flat. Lazy FI Mum’s parents took a similar (but not identical) approach. We are both very grateful for it. In part 2, you can read about my views about gifts and how they differ depending on if I’m the child or the parent in the scenario.
What will Lazy FI Family do?
Lazy FI Mum and I both agreed to use the mixed approach. However, when we discussed what it actually means (what we’re willing to pay for) we already had some disagreements :). I’ll keep you updated once our kids choose (or not) their university degrees.
Which approach do you prefer?
Please let me know (in the comments section below) which approach you prefer, both as the child (receiving) and as the parent (giving), I’d be really interested in hearing any angles I may have missed.