I admire Warren Buffett, and particularly respect him for the billions he donates to charity. He and Bill Gates are the world's most generous philanthropists, and Buffet has pledged to give away 99 percent of his wealth. But today, I throw down the gauntlet to the Oracle of Omaha on his advice on inheritance.
Buffett said, "A rich person should leave his kids enough to do anything but not enough to do nothing."
Many of our clients and prospective clients reference this famous quote. They are concerned about how much wealth to pass along to their children. While they like the idea of giving them enough financial security to choose meaningful work, they worry whether a substantial inheritance would still let their children be productive members of society.
They aren't alone. Over the next 30 years, baby boomers will be transferring an estimated $30 trillion to their children and grandchildren, the largest transfer of wealth in U.S. history, according to the consulting firm Accenture, as reported in an article in Time magazine.
While I agree with Buffett's sentiment, my issue is that this advice just skims the surface. There is so much more to consider when contemplating the transfer of wealth to your children. I challenge you to take a closer look and consider these five factors.
1. The Buffett Rule doesn't define how much money is enough to empower but not disable your children. Some people think $1 million to $2 million is more than enough, while others would consider that sum far too low.
I recently spoke to a group in New York City and one attendee said, "You need a minimum of $5 million to $10 million to retire with a middle-class lifestyle in America." I imagine he plans for his kids to each inherit at least $5 million, which many would contend is enough to do nothing.
2. The Buffett Rule is geared towards relatively young children. It is obviously more important to worry about instilling our values on our children when they are young. But if they are older, in their 30s, 40s or 50s, and have already been in the working world, they have either developed a work ethic or they haven't. The concern about children having no motivation because they inherited too much money generally diminishes the older the children get.
This also highlights an important principle; estate plans need to be revisited on a regular basis as your children age.
3. The Buffett Rule doesn't address the issue of what percentage of your assets you want to leave to your children. Let's say Mom and Dad have $75 million and three children. They discuss the Buffett Rule and determine splitting $10 million three ways is appropriate. The rest of the money, $65 million, will go to charity. But when they see that nearly 13 percent of their wealth will go to their children and 87 percent to charity, those percentages can seem disproportionate to the parents and ignite a desire to leave more to the children.
4. The Buffett Rule talks only in terms of amount of money and doesn't address the issue of control. Some families are comfortable leaving their kids total discretion over what they do with their inheritance. Others are more comfortable leaving all or a portion of the money in trust, protecting the assets from creditors such as a divorcing spouse and from poor investment management decisions. Trusts can also be used to restrict access to the funds to encourage the children to work.
5. The Buffett Rule doesn't address emotional issues surrounding an inheritance. Sadly, children sometimes equate the size of an inheritance with how much their parents loved them, or they may interpret a small inheritance as a lack of confidence in their ability to handle the money wisely. And while the Buffett Rule hints at the desire to instill a work ethic after the parents die, it does not cover other values parents may wish to pass along.
To address these emotional issues, we encourage our clients to have a family discussion with their children about the expected inheritance and the rationale behind it.
We are also in the initial stages of implementing a program to help our clients write "legacy letters" to each of their children. The purpose of these letters is to communicate their rationale behind their estate decisions, impart words of wisdom and life lessons, and share what they admired most about each child.
We are conducting a beta test with five clients to see if the program is viable, achieves its intended purposes, and actually benefits our clients and their families. If it goes well, we expect to roll out the program with other clients in early 2016.
We believe that these legacy letters may be among the most cherished items in the parents' estates, worth far more than their wealth. Though each situation is unique, our hope is that Mom and Dad will read the letter to each child while they are still here to answer any questions the kids might have about their estate.
Warren Buffett's sentiment as expressed in his quote can be a good starting point when considering transfer of your wealth. But it's just a start to this complicated and often emotionally fraught issue. It takes time to develop a plan for transferring wealth that is best for you and your children. But it's an investment worth making.
David Geller is the author of Wealth & Happiness: Using Your Wealth to Create a Better Life. He is the CEO of Atlanta-based GV Financial Advisors and is available for professional speaking engagements.