Wealth is like a blazing fire; it can cook and warm, or it can burn and destroy. And which it does to your heirs depends, to a great extent, on how you hand it off to them. This very real danger is commonly recognized by families with wealth, which is why so much of heirs’ inheritances are locked up in trusts doling out the funds in ways and at times that hopefully will do more good than harm—but who really knows. As one inheritor told me, “Trusts are really vehicles of distrust.” A rather profound observation, I think.
With this imagery of wealth in mind, it would be time well spent for parents, as they contemplate the amount and timing of their heirs’ inheritance, to conduct an inheritance “fire drill” to determine how prepared their heirs are to receive an inheritance, and how well thought-out the timing and the amount really is. Before we get into the actual fire drill, it would be wise to get a biblical perspective and understanding on the topic of inheritances. Much of what the Bible says about inheritances is found in the book of Proverbs. Keep in mind that a proverb is not a command on what we should do, but merely an observation of what man does, and its outcome. So, the following verses will be instructive, but not directive.
Proverbs 13:22 says, A good man leaves an inheritance to his children’s children. We see two things here: One, inheritance-leaving is done by good people, and two, their inheritance carries an impact even to their grandchildren (affectionately known in the legal world as the “skipped generation”). It is interesting to note that the word “inheritance” and its’ derivatives “heritage” and “heir” are all related to the Greek word for “bereaved.” In other words, by the very meaning of the word, an inheritance is something received by survivors at the time of death of a parent. The challenge in planning is there is no certainty when a parent’s death might occur. Consequently, there is no certainty when an inheritance might be received.
Proverbs 19:14 says, House and wealth are inherited from fathers, but a prudent wife is from the Lord. This verse is often used as a directive that fathers have a biblical obligation to leave wealth to their heirs. But if you read this verse carefully, you will see that Solomon is comparing what fathers give (wealth) to what God gives (a prudent wife), emphasizing that God’s gift is vastly greater than a father’s gift. This verse is really addressing a man’s wife, and not his inheritance. Solomon only notes that affluent fathers do give inheritances to their heirs.
Proverbs 20:21 may be one of the most instructive verses for us. It observes, An inheritance gained hastily in the beginning will not be blessed in the end. It is fascinating to read what commentators have to say about this verse, if they comment at all. Even though this verse seems somewhat unclear, it does note that the outcome of this “hasty” inheritance is not a good thing. But what is a “hasty” inheritance?
Allow me to paraphrase this verse to give us better clarity of what I think Solomon was observing, “An early inheritance received before an heir is prepared for it will prove to be a curse and not a blessing in the end.” This observation is further supported by Proverbs 19:10a, It is not fitting for a fool to live in luxury, and Proverbs 17:16, Of what use is money in the hand of a fool, since he has no desire to get wisdom?
The solution to the “hasty” inheritance problem is found in Ecclesiastes 7:11, Wisdom along with an inheritance is good and an advantage to those who see the sun. If you are going to give your heirs an inheritance, make sure you give them the wisdom to know what to do with it. In other words, give them wisdom, or don’t give them wealth. Solomon reinforces this dilemma in his own personal wealth transfer situation in Ecclesiastes 2:18-21. He confesses,
Thus I hated all the fruit of my labor for which I had labored under the sun, for I must leave it to the man who will come after me. And who knows whether he will be a wise man or a fool? Yet he will have control over all the fruit of my labor for which I have labored by acting wisely under the sun. This too is vanity. Therefore I completely despaired of all the fruit of my labor for which I had labored under the sun. When there is a man who has labored with wisdom, knowledge and skill, then he gives his legacy to one who has not labored with them. This too is vanity and a great evil.
Give them wisdom, or don’t give them wealth. It is quite obvious which of these two inheritances is the most difficult to give. In truth, if you give them wisdom, you probably won’t need to give them your wealth. Sadly, most parents have concluded it is easier to set up trusts than it is to attempt to impart practical and biblical wisdom.
I have referred to the story of the “rich fool” (the farmer who decided to tear down his current barns and build bigger ones) on occasion in my writings, but I have never mentioned what it was that led Jesus to share this parable. It was precipitated by an appeal of a man who came to Jesus pleading, Teacher, tell my brother to divide the inheritance with me (Luke 12:13) –an inheritance conflict. The dad was dead and one brother was feeling slighted and wanted “justice.” Solomon was right. There is “nothing new under the sun.” Having this biblical background, let’s begin the inheritance fire drill.
Step #1: Discern Your View of an Inheritance
This first step is critically important to the fire drill, but is almost never addressed by parents, or the traditional estate planning approach. I ask you this important question: Is an inheritance an inherent right or an unearned privilege? Because your children are your children and you are affluent, do they have an inherent right to an inheritance simply because they happened to have “popped out of the right womb?” Or, if they receive anything they did not work for is it an unearned privilege—an unexpected “bonus?” Can you see why this question is so fundamentally important?
Let me ask it in another way. Is an inheritance a required obligation we owe our heirs or is it an optional gift we can freely bestow on them if and when we choose? Many parents feel that their children have a right to an inheritance and feel obligated to pay them what they owe. I think this is the reason a certain bumper sticker has hit such a responsive chord in all of us. Have you seen it? It says, “I am spending my children’s inheritance.” Interesting idea, isn’t it? The implication is that the children already own their inheritance and Mom and Dad are spending the kid’s money on their lifestyle. What bizarre thinking. However, this is the kind of thinking that is all too common among affluent parents. Don’t move on to step #2 until you are clear on your view of an inheritance.
Step #2: Determine the Purpose of an Inheritance
If you believe you have a required obligation to give your heirs an inheritance, it may simply be to pay what you owe them. Rather, if you believe that an inheritance is an unearned privilege (a gift that is optional), you are free to decide on any amount and purpose that you deem to be wise and helpful to them.
Do you want your children’s inheritance to fund lifestyle or opportunity? This is a critically important question because the difference between wanting to provide them with assets and income needed to maintain a desired lifestyle and providing them with the funding to give them greater opportunities in life is massive. Do you want to assist them along the way, or do you want to carry them along the way?
The reason this question is so critical is because it addresses two vital issues, the amount and the timing of an inheritance. If you want to help them get a good start in life (by helping them with college, getting their first house, getting a business started, maybe helping send their kids to a private Christian school, etc.), it needs to be done earlier in life, not when parents finally eternally relocate at 85 and the children are 60. What is an inheritance going to do for them then, supplement their retirement income?
If parents are looking to fund opportunity, the idea of lifetime inheritance planning becomes essential and the children’s inheritance will be given in planned amounts, for specific reasons, to help them along the way as the needs and opportunities arise while the parents are still here to observe, monitor, and coach their heirs. If parents are looking to fund lifestyle, you can be sure that their heirs will grow financially dependent on them and their wealth for the rest of their lives and beyond.
Would your life be the same as it is today if you had received a substantial inheritance at some point earlier in your life? Would your life now be better or worse because of it? Interesting questions, aren’t they? I think it is safe to say that all of us would agree that our lives would not be the same as they are now. What we cannot say is if whether they would be better or worse. Let me now ask you, what will happen to your children’s lives when they receive what your current inheritance plan will provide for them? Will their lives be better or worse? Here is the fundamental question: “Specifically, what do you want your children’s inheritance to do for them?” Don’t go on to step #3 until you determine the purpose of an inheritance.
Step #3: Calculate the Timing and the Amount of an Inheritance
Now that you are clear on your view and the purpose of an inheritance, you are ready to calculate how much of an inheritance would be appropriate, and when it would be best to give it to them. After over 30 years of working with affluent families, I have compiled a list of the ten most common reasons for inheritances.
For each numeral below, and using today’s dollars, list the amount you believe would be needed to provide the various inheritances you want each of your children to have, and when you would want them to have it. You will want to do this exercise for each child since the needs, abilities, and maturity of each are likely different. As we all know, our children are not created equal. What may be good for one may actually be bad for another.
1. Family business
2. Funds available for new business start up
3. Funds for a first home (down payment or mortgage payment)
4. Funds to establish an emergency reserve (personal, medical, etc.)
5. Funds for tuition (partial or total cost), children/grandchildren’s education
6. Funds for increased charitable giving
7. Funds to provide ongoing income for a pre-set desired lifestyle
8. Family property or funding for other property (boats, cars, motor home, plane, etc.)
9. Family residence/farm/homestead/vacation home
10. Funds to provide ongoing income due to special needs/disabilities (physical/emotional)