How Much Inheritance Should You Give Your Children?

How Much Inheritance Should You Give Your Children?

How Much Inheritance Should You Give Your Children?

“I want half of the money!”

“I want half of the money!”

“I want half of the money!”

A friend had put his son’s name as co-owner of an investment property, as a basic form of inheritance planning. Him and his wife had decided to sell the property, and was in the process of signing the sale agreement. Despite not having put a single dollar towards the property, the son said he would only sign if he got half of the proceeds, as was his ‘right’ as co-owner.

“I need to sell this at a huge loss.”

The parents had bought a prized real estate asset and overpaid for it. Their idea was to secure a steady cashflow of $1 million per year for each of their two children, so that they would have financial security for life. Unfortunately both children had their own ideas, wanting to live in London and the US, not caring about the tax consequences, and not wanting to work in the oversight of this real estate asset based in Asia. The parents sold it at a loss of more than $50 million.

One of the common goals of successful parents is to provide financial security to the next generation, so that they do not have to endure the same hardships the parents went through. However too many go too far in this.

A close friend was asked by her three children to distribute their share of the inheritance, while she was 70 years old and still had a few decades of life to look forward to. She dutifully did this, and left for herself what she thought was enough to last to the end of her days. Unfortunately she developed cancer, and now counts all her expenditures, and flies long haul in economy class to save money.  She has not asked the children for financial support, nor have they offered it. 

Do we owe our children anything, beyond a good upbringing and education, and perhaps some financial assistance at the beginning of their career? Does a sizeable inheritance make them lazy and without a purpose in life? And what about much larger multi-generational wealth?

In Asia the default family assumption is that all of the parents’ wealth will pass onto the children.  At the turn of the last century Andrew Carnegie, a Scottish immigrant who arrived in the United States with nothing became the world’s richest person after a life of hard work. After selling his business, he devoted himself to giving his fortune away, and wrote The Gospel of Wealth, where he said:

“The parent who leaves his son enormous wealth generally deadens the talents and energies of the son, and tempts him to lead a less useful and less worthy life than he otherwise would’.”

The idea that large sums of wealth corrupt future generations and make them ‘useless’ is a common idea to this day. Warren Buffett’s statement that he plans to leave his children enough wealth so that they can do anything, but not so much that they can do nothing, seems to be an enlightened viewpoint on how to handle multi-generational wealth, avoiding the ancient Chinese proverb of rags to riches and back to rags in three generations.

Carnegie’s words, echoed by many first generation wealth creators who came from nothing, is that young people who have no incentive to work are leading a life that is less worthy and devoid of purpose.  Some choose to give their money to charity, thinking it the right path to give back, while also saving their children from the evils of money. And yet so many children equate money received from their parents with love from their parents, and so are greatly hurt if it is given away to charity.

My father told me, as soon as I was old enough to understand the meaning of this, that money to him meant only one thing: freedom to do what he wanted to do at his own terms. 

While most would be under the impression that running a multi-family office is all about investment returns, in reality questions such as how much to give their children, and how to do it so that it doesn’t ruin their lives, are far more important to the first generation.

Having dealt with many such cases, we have observed four things that consistently do not work (and yet are done over and over again), and one thing that is almost never done, but should be.  With 80% of wealth having been created by first generation, the world will transition into the largest intra-generational wealth transfer in history. 

The first step is to define the values of the wealth creators, and put a plan in place that supports the achievement of these goals.  This could be leaving all their wealth to their kids, or none of it.

In our experience it is not money that ruins the next generation. Let’s take the common practice of paying money, or buying a gift, to children for every ‘A’ grade they achieve in school.  Just like education in general, education about money is critical, but overlooked. If getting paid money to get a good grade in school is a good system, what happens when the children grow up and the material incentive is absent, or worse still becomes meaningless because of a large sum of inherited wealth. It is not money that ruins children, it is the absence of a work ethic through ineffective psychological tasks while they were growing up.

A 60 year old study done by two Harvard psychiatrists examined the factors in children’s lives that help predict mental illness or mental health. The key finding was that it’s important to develop a good self-image when young, and the best way to do that was to become a self-starter. The ability to motivate one’s self, without the need for external factors like money, was a critical difference in children that went on to live happy and fulfilled lives, versus the others that didn’t.  Internalising the concept of being excellent at something without an external reward is the best way to give your children a good start in life.  When this is coupled with a large inheritance with a sense of stewardship for the next generation and to improve the world, magical things can happen.

My wife, whose father couldn’t afford to pay school fees for all four children, took it upon herself at a young age to start working in order to put herself and her younger sister through school. This self-starter mentality enabled her to come out of poverty and become successful, where she now financially assists the rest of the family.

Instead of rewards for grades, give your children a modest allowance which will teach them how to make financial choices. And that if they want more, they need to work for it. 

Below are some common pitfalls parents make around money and their children:

  1. Control 

    • Parenting with your wallet;
    • Making an adult do something they do not want to do (especially if they are dependent on it) does not lead to an authentic relationship.  Do you want your kids spending time with you only because of money?
    • Using money as a substitute or expression of love.

2. Not talking about it and not preparing kids for it 

    • Whether or not you give kids any it is critical to tell them and prepare them;
    • Validate that you have more than others and that this can be awkward and uncomfortable;
    • Not preparing kids for the money or the perception other people have about the rich; 
    • Not instilling financial responsibility; 
    • Inheritance can bring guilt and shame.  Instilling the value of philanthropy and giving back significantly reduces the burden.

3. Defining success with money or expecting kids to work as hard as you or have the same determination/grit/work ethic 

    • Research shows nearly 80% of current wealth holders are 1st generation who created it themselves, and that the majority say they grew up in lower to lower middle class financial lifestyles.  Growing up with limited resources can create desperation, resilience, grit and determination to succeed financially.  Expecting or hoping kids who are raised in abundance will have this type of work ethic is not realistic. The phrase ‘my kids are so lazy, at their age I was working all the time’ is the most common one we hear from successful parents. 
    • Parents need to accept that it is extremely likely that their children will not match or exceed the level of financial success as their parents.
    • For children, it is paralyzing if this is the only metric of success.  The shadow of the parents cannot be escaped.  
    • This is the case for kids even if you leave them nothing.  They still grow up in the shadow of a level of financial success they will likely never get close to. 
    • If money is the way to make you proud, your kid is set up to fail.

4. Raising kids with a lifestyle they have no chance to sustain on their own

    • Consider giving kids at least enough to sustain the lifestyle you have raised them with. This goes hand in hand with not giving your children too much that they haven’t worked for. Too many young kids are already traveling in first and business class.
      • The majority of children hope/expect to live at or above the lifestyle in which they were raised;
      • Raising children with a lifestyle they will likely not be able to sustain tends to have negative implications on the well-being of the child and their relationship with their parents;
    • Many wealth creators want to enjoy the wealth they earned and live a lavish lifestyle.  We have seen many next gens miserable and resentful to not be given any inheritance and become completely unprepared to live with less.

5. Give while you are alive not just at your death. 

Withholding wealth, a widely accepted approach, can foster long term resentment in children. Why not instead focus on the next generation’s individual pursuits of happiness, on the challenges that interest them, while instilling in them a sense of stewardship for the family wealth so that it benefits their own future generations, as well as the world around us. 

With significant wealth, the first generation has more opportunity than most to make the world a better place than it was before you arrived. How you do it is up to you.  What matters is that you do it. 


Co-founder of AL Wealth Partners, an independent Singapore-based company providing investment and fund management services to endowments and family offices, and wealth-advisory services to accredited individual investors.