Make sure kids don’t inherit too much

It’s natural for parents to worry. And, if they’re rich, they’re probably concerned about spoiling their children.

Tim Cestnick, president of WaterStreet Group family office in Toronto, says giving kids too much money during adolescence, or alerting them to their impending inheritances, can be detrimental to their development.

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“A child who knows that they’ve got multi-millions of dollars coming to them one day […] may not develop that motivation to find a career and to be productive.”

Many wealthy agree.

According a 2010 RBC Wealth Management survey, 58% of millionaires think their children are facing an uphill battle when it comes to managing finances and 49% don’t have confidence in their children’s abilities to manage inheritances.

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As a result, many parents are placing conditions on their bequests.

One Vancouver businessman, who had sold his construction company, wanted to give his children $250,000 each to pay off their mortgages. But he balked when he considered how he was making it easy for them to simply buy more with what they would now be saving.

Ultimately, he did pay off the mortgages, but with a condition. The children had to continue to make the equivalent of their house payments to him, and he would invest the money on their behalf. As a successful businessman, perhaps he just yearned to be in control; but he also wanted to ensure the money he’d worked so hard for was used appropriately.

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Similarly, Toronto businessman was horrified when he discovered that each of his children stood to inherit upwards of $30 million. He felt it would ruin them by altering their lifestyles too suddenly and dramatically, and removing their work ethic.

To address this concern, he and his wealth manager devised a plan to leave each child a few million and have the bulk of his estate go to starting a charitable foundation. His wife and children will sit on the board of the foundation and make joint decisions about how it’s run and where the money goes.

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And the New York Times reports, “Some wary parents are creating trusts that name spouses as beneficiaries along with their children.”

But it’s not just parents’ deaths that trigger problems for wealthy kids. Having ample access to money growing up may lead to feelings of paranoia — played out at its lowest level by the avoidance of forming close relationships.

Cestnick says this sometimes happens to wealthy children where they don’t know who to trust and will often question the authenticity of their friendships. He says that generally becomes an issue among families with net worths exceeding $20 million.

Parts of this story originally appeared on capitalmagazine.ca