How to prevent your children catching ‘rich kid-itis’
September 25, 2017
How can I support my children without ruining them?
Mark Zuckerberg has famously declared that he intends to leave 99% of his Facebook fortune to charity, leaving 1% to be distributed amongst his family and friends. Others in the uber wealthy circles have put their names to the Giving Pledge, initiated by Bill and Melinda Gates. The reasons for this involve the wish to further charitable causes, but also to encourage their children to create their own lives with purpose and achievement, and not rely on and ultimately squander financial gifts from their successful parents.
Although the numbers may be different, for many of us the question remains the same: How can I support my children without ruining them?
Everyone has seen the photos and stories of wealthy children dropping out of expensive private education, having problems with drink, drugs and party lifestyles with no desire to succeed in their chosen career. It is a worrying thought for parents, but how do you stop your children from resting on their laurels?
A few leave their children to build their life in the same way they did, with very little or no financial support, others will match the amount earned by their offspring, giving them some incentive to make an effort (see Sir Jack Petchey “the 50/50 Man”).
It is a common belief that children are not responsible enough to inherit a large amount of wealth in a single sum at a young age. That they are likely to fritter away the money within a short space of time on a lavish lifestyle, wasting the years of hard work and careful management put in by their parents. Whilst alive, parents can control how and when they hand over their hard-earned cash but on their death the law in England and Wales states that children inherit at 18.
For this reason many parents defer the age at which their children inherit to 21 or 25 in their will. For example, Princess Diana left her estate to Prince William and Prince Henry for them to inherit at 25. Up until this age the wealth is held in a trust fund and is managed by carefully chosen trustees with powers as wide or as limited as the parent decides. In carefully choosing the terms of the trust the parent can retain some control over how their wealth is used and distributed for years even after they have passed away, which, as in the case of Princess Diana, may unfortunately occur earlier than expected.
However, rather than waiting to set them up in your will, it is also possible to create trusts during your lifetime. This can offer useful tax planning opportunities as well as the benefits of ring-fencing wealth for your children or grandchildren when they need it. You may then wish to add to these trusts in your will. Michael Jackson and Frank Sinatra both left large amounts of their estates to trusts created during their lifetime.
Whilst children are often the primary concern, it can sometimes be worth looking to the next generation as well or instead, and providing a controlled release of funds for grandchildren or even great-grandchildren. By the time parents have built up their wealth and are in a position to make it available to their descendants it may be that their children do not require it for the same reasons. They may already have their house and careers and instead it may be appreciated more in covering school fees for grandchildren, or helping them with their first investments. This may also help to minimise duplication of inheritance tax.
As each child has different strengths and characters, the trusts can be tailored to suit each individual. The trustees could release the funds in a constant trickle of income or a flood of capital every now and again. A recent case has confirmed that the value of the trust fund can be kept secret from the beneficiary if this is in their best interests.
Trusts are not the only option available. There has recently been an increased interest in family investment companies in the UK, and other countries have their own foundation, corporate entity and joint holding structures. A family investment company (FIC) is a UK-resident private limited company whose shareholders are family members. The vehicle can be extremely tax-efficient where an individual transfers significant sums of cash into a company, with the cash invested generating income for the family.
The choice will depend upon your particular circumstances and wishes, having considered all the factors, including the amount of control you want, tax consequences, and the ages and goals of the beneficiaries amongst others.
Having built up the wealth and put the legal and financial structures in place all that is left is to instil a positive work ethic and an appreciation of the value of money into your children!
For further information and advice in this area please contact Janice Martin or Laura Wynn.