Five years ago, Bill Bonner, my friend and business partner, asked me to speak to a group of about fifty old, wealthy white people meeting in an exclusive beach resort. He wanted me to discuss “the challenge of intergenerational wealth.”
What the heck is intergenerational wealth?
It’s the wealth you’ve acquired for your children, grandchildren, and maybe even your great-grandchildren.
The challenge is how to preserve it. History tells us that people usually squander any money they inherit. And if they don’t squander it, their children surely will.
This is a serious problem for seriously wealthy people. But I believe it’s a problem for middle-class people, as well.
It’s not just about keeping your kids from pissing away the money you worked so hard to save. It’s about keeping that money from turning them into the kind of adults you don’t want them to be.
The experience of speaking to that bunch of fifty grumpy old folks gave me a number of new and useful ideas about this problem, and I’d like to share those ideas with you in this essay.
As our family CEO, K waged a war against this by having high expectations of our kids as students and as family members. She was strict with household rules and stingy with luxuries.
If our boys failed to maintain a B+ average, we didn’t allow them to go out. Period. Before they could play on weekends, they had to work around the house. And the work was real: cleaning toilets and cutting the lawn. We had no live TV. Video games were verboten. We never bought them clothes or toys when they asked for them. They had to wait for their birthdays or Christmas. But most of all, we expected our kids to be respectful to us and to others. In other words, they were part of the universe, not the center of it.
K’s approach worked. Our children were not spoiled. Although — I must admit — I had doubts at times. Once, a few hours before picking up his date for the junior prom, I found my eldest son polishing the vinyl seat of the vehicle he was driving to the event: his twenty-year-old, rusted-out pick-up truck. (He had bought it from his grandfather.) He worked away at it in good spirits, seemingly oblivious to the stuffing coming out of a large tear in the middle of the seat. I wondered if we had gone too far.
Now, I have no doubts.
What About Your Adult Children? How Bad
Can It Be to Give Them a Little Help?
If money can spoil your children when they are little, can it spoil them after they are grown?
We have friends who gave their kids financial support when they graduated from college. Some are still doing so after more than ten years. They justify this by talking about how bad the economy is and how difficult it is for young people to find jobs.
To my mind, this isn’t much different than welfare. Can’t they see what they are doing to their children — making them more dependent with every handout? They can’t be that blind. Maybe they choose to ignore it, telling themselves that they are doing what good parents do: making their children’s lives easier. Or maybe they simply enjoy the feeling of being needed.
This kind of unconditional financial support is clearly bad. And yet I’m not ready to say that any sort of financial help is wrong.
Another — Maybe Better — Approach
Meanwhile, my friend Bill and his wife, E, took a different approach. They avoided lying when their children were small by simply avoiding the topic of money. Talking about money, they taught their children, was gauche.
But then, as the children grew into adults, they began to talk quite frequently and openly about their money. In fact, they formed a legal structure designed to preserve the family’s intergenerational wealth.
In preparing that speech Bill asked me to give on “the challenge of intergenerational wealth,” I had a conversation with him about our different approaches. And it changed some of my thinking.
I told him what we had done and said that we were happy with the results. I also told him that now that my children were adults — and their characters were largely formed — I was having trouble not helping them.
And then we talked about the inheritance issue.
He was surprised to hear that our children still believed they would not inherit anything from us.
“How long do you intend to continue with this lie?” he asked.
“’Til the bitter end,” I answered.
“So they will find out after you are gone that they have all this money,” he said. “Just like that?”
“And they won’t have had any guidance from you on how to manage that money … how to work together to preserve and grow it … how to use it productively?”
That hit me like a ton of bricks.
My kids knew how to work hard. They knew how to enjoy their lives. But I now realized that one day they would inherit many financial assets about which they knew nothing.
So K and I decided to have a family meeting. We made it a formal meeting and asked our family attorney to preside. At that meeting, we showed our three boys — for the very first time — the sum of our assets. And we told them that we intended for them to inherit some portion of that.
I am pleased to report that their first reaction was negative. “We don’t need your money,” they told us. “And we don’t want it.”
Since then, we’ve had several more meetings, and those meetings are influenced by a publication and organization that Bill and his eldest son, Will, started. It’s called — appropriately — The Bonner Family Office.
One big idea that we borrowed from the BFO concerns the purpose of inherited wealth. Bill doesn’t believe in cutting up wealth among the children so that they can do with it what they like. He sees wealth as an integral family asset that should function more like a bank.
Rather than inheriting lump sums of money, the children inherit an interest in the family fund. The purpose of that fund is to help individual family members enrich their lives … but how they do that must make sense.
Children can borrow from the fund. But if they do, they must return the borrowed money with interest. They can use the money to start businesses or pursue education, but they can’t use it to buy sports cars or yachts. They also should help the fund grow in value. That way, when they die, it’s larger than it was — large enough to help their own children.
As it happens, I had formed The Ford Family Limited Partnership twenty years prior to this, so we used that structure to accomplish these goals.
We’ve already used the partnership to extend two loans: one to help our eldest son buy a house and another to help our second son start a business. Without access to these funds, neither of them could have done those things. Their credit may not be good enough for banks, but it is good enough for us. Having the limited partnership structure allows us to provide a financial benefit to them without spoiling them.
Another thing we’ve done is include our children in a charitable project I started in Nicaragua a number of years ago. It’s a community center that provides educational and recreational facilities for local people. Originally, I saw this as a personal project — my own experiment in charitable giving. But now, by inviting the family to get involved, I’ve benefited in two ways: I have their help in developing the center, and I can expect that it will be preserved after my death.
Our youngest son took over as director of the center two years ago. He’s done a great job of it, hiring capable people and vastly improving the scope and quality of services. He receives a stipend for doing this. In addition, he’s learning how to manage a somewhat complicated business with twenty employees and hundreds of “customers.” (He asks me questions and sometimes listens to my answers.)
The Ford Family Limited Partnership owns rental real estate, which seems to be the perfect vehicle for our purposes. And recently, our second son agreed to manage those properties. As a musician and composer, he had very little exposure to real estate investing or business management. But he’s taken to it like a duck to water. He spends several hours each week learning about the real estate business, learning that — like the music business — it can be both fun and challenging. Like our youngest son, he receives compensation for his efforts. This gives us a way to help him out financially that is merited rather than entitled.
Our oldest son hasn’t gotten involved in any of the family businesses, but perhaps he will one day. If not, there’s always the chance that a cousin or grandchild might want to get involved.
We still have plenty of assets to figure out, but we are comfortable with what we have done so far.
The community center in Nicaragua is fast becoming a project we all feel proud to contribute to. And the real estate business has already become a cool little private bank that can make loans to family members while it grows its asset base steadily and safely.
In general, I feel like we’re doing a smart thing: involving our children — while we are still around to provide advice and guidance — in the management of the assets that they will one day inherit.
So what have we learned about this complicated subject?
While your children are young …
Don’t buy them expensive things just because you were poor and never had them. Remember that giving your children less is sometimes giving them more.
Expect them to work — and not just at their education. Give them menial household chores and pay them fair-market value for their work. Never overpay them.
Avoid discussions of family wealth. If the subject of inheritance comes up, tell them they aren’t getting anything.
When your children leave home …
Make it clear that their bedroom is no longer their bedroom. Put their personal effects in storage. Tell them they are welcome to come home for brief periods as a guest. Remind them that guests are always well mannered.
When your children become adults …
After your children have proven to you that they can take care of themselves, you can begin to discuss family wealth, including what they might one day inherit.
Consider putting a business or some income-producing assets into a legal structure that can operate as a family bank, making loans to them when merited.
Consider establishing a family charity (if you believe in charity).
Use the family bank and charity to teach your adult children what you have learned about managing wealth.
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