3000: How to Pass Wealth to Your Kids by ESI on Family Wealth Planning

[00:00:00] Oh, I'm asking, baby. Now go to the couch and watch TV, because The Housemate, if she knew, is available for streaming now. What really is inside the perfect facade? Just pure excitement with Sidney Sweeney and Amanda Seyfried. The Housemate, the thriller, which everyone speaks. Now see.

[00:00:37] In which, instead of reading to you myself from an article about relationship building, I share a previously aired episode from one of our other shows in our network that I think you might enjoy. Today's comes from Optimal Finance Daily, our show that covers all sorts of posts about personal finance information and how to cultivate a smart money mindset. So with that, let's hear our host over there, Diana, narrate this post for you and provide her commentary as well as we optimize your life.

[00:01:08] How to Pass Wealth to Your Kids by ESI of ESIMoney.com Have you ever heard the phrase, shirt sleeves to shirt sleeves in three generations? FamilyTreeVideo.com notes that other cultures have similar sayings. In Japan, it's rice patties to rice patties in three generations. In Scotland, it's the father buys, the son builds, the grandchild sells, and his son begs.

[00:01:36] And in China, it's wealth never survives three generations. And here's how it explains them all. Quote,

[00:02:13] Quote, The first generation experiences a life of hardship and is determined to make something better for themselves. They're willing to work hard and save diligently in order to achieve their goal. By their later years, their efforts have paid off and they enjoy a comfortable lifestyle often with assets to pass on. Their children, the second generation, grow up a witness to their parents' struggle and understand the value of hard work.

[00:02:38] Although they now live a more comfortable lifestyle, they may still remember a childhood filled with frugality. Because of this awareness, they make sound educational and financial choices that allow them to build upon the foundation their parents worked so hard to create. By retirement, they've acquired even greater wealth. The third generation, however, has no memory of want or struggle.

[00:03:01] They only know a life of plenty and often lack a realistic understanding of the work needed to create and maintain the lifestyle they now enjoy. When family wealth is passed on, the third generation is simply left to squander what their grandparents and parents worked so hard to achieve. End quote. I'm the second generation in this story. I saw how my parents and grandparents struggled and had various levels of success. Nothing great, mind you.

[00:03:29] I grew up understanding the value of hard work. Walking beans will do that to you. And certainly had a childhood filled with frugality. As a result, I made sound educational and financial choices that allowed me to build on what my parents did. Doing so, I was ultimately able to acquire a solid net worth. The third generation. My kids are the third generation. They have no memory of want or struggle.

[00:03:56] We're not big spenders, as you know, but there was certainly never a lack. We've taken the kids on three cruises and have been all over the U.S. traveling. They've been on service trips out of the country as well. We do things like buy them new cars and pay for college. They've only known a life of plenty. I wonder if they lack a realistic understanding of the work needed to create and maintain the lifestyle they now enjoy. I wonder if they'll squander what my wife and I have worked so hard to achieve.

[00:04:26] It's too soon to tell. It's hard to pass wealth along. Here are some numbers on how hard it is to transfer wealth intergenerationally. 70% of millionaires lose their wealth by the second generation. And 90% of millionaires lose their wealth by the third generation. Seems like the old saying is true. Shirt sleeves to shirt sleeves in three generations is a real thing. I once knew a family where the father started out poor.

[00:04:56] He worked several decades and eventually built a successful business. He's now very wealthy. His kids, who are my age, saw and lived the struggles their parents faced. They remember working at the business for a few dollars an hour. They recall the time the company almost went bankrupt. They remember when meals were hard to come by. Their kids, the grandchildren of the father, on the other hand, have always known a family that was extremely wealthy. They don't want anything to do with the business or even work for that matter.

[00:05:26] All they want is their share of the fortune. I know the grandparents and parents are trying to figure out if and how to pass their wealth along without simply flushing it down the toilet or ruining lives. How to pass wealth along. We obviously don't have a great fortune like that, but we do have a good amount of wealth. As we're working on updating our will and estate plan, we're also wondering if and how to pass along our wealth. Do we give it to all the kids?

[00:05:54] Give them nothing but the education and some financial support along the way? Or do we give them part of what we have and give the rest away? We're still trying to sort that out. I wonder if giving money to our kids once they're adults will harm them. Why? Because one of the seven common traits of millionaires detailed in The Millionaire Next Door is their parents did not provide economic outpatient care. For those of you wondering what that is, economic outpatient care is defined as, quote,

[00:06:23] Economic outpatient care, or EOC, is a term used to express when an affluent parent provides money to an adult child. Offspring who receive EOC have 57% of the net worth compared to their counterparts who are not recipients of EOC. EOC gives recipients a false sense of financial security. For this reason, they purchase homes in upscale neighborhoods that exceed the recommended value according to their incomes.

[00:06:53] These homes then demand nice cars for the driveway, nice furniture for the living room, and a nice plasma TV to complement the furniture. These offspring also purchase and consume the EOC rather than invest it. If a dose of EOC is given on a regular basis, the EOC can actually be absorbed into the individual's perceived annual income. Expenditures are then calculated with the anticipation of a regularly scheduled dose of EOC, end quote.

[00:07:23] In other words, people who support their adult children financially on a regular basis aren't really helping the kids. They're enabling them. In the long run, the kids end up being terrible money managers as a result. Obviously, this is not something I want for my kids. Can you teach wealth? It seems to me that in many ways, wealth is not teachable. For instance, if knowledge of financial matters was all that it took to become wealthy,

[00:07:50] most business people, professors, financial planners, and many others would be very wealthy. And yet most aren't. The reason? Because becoming wealthy requires much more than knowledge. It requires discipline, hard work, patience, self-control, sacrifice, and a few other traits that are much harder to teach and pass along than pure educational knowledge and learning. Of course, we've tried to do this and time will tell whether it works or not.

[00:08:17] Both of our kids have jobs and work 25 to 35 hours a week. My daughter is also going to college part-time. But have they developed the skills to be able to handle a windfall of half a million dollars, a million dollars or more? You just listened to the post titled, How to Pass Wealth to Your Kids by ESI of ESIMoney.com.

[00:08:43] This article reminded me of a popular book within the FI community titled, Die with Zero by Bill Perkins. Bill says, quote, If you spend hours and hours of your life acquiring money and then die without spending all of that money, then you've needlessly wasted too many precious hours of your life. There's just no way to get those hours back. If you die with a million dollars left, that's a million dollars of experiences you didn't have.

[00:09:16] No way is that optimal. The question we must all answer is how to make the most of our finite time on earth, end quote. He also makes the argument that rather than leaving your children a large inheritance when they're middle-aged and likely already financially established, you may consider giving your children whatever you have allocated for them before you die. That way you can give it when it'll have the most impact on their lives.

[00:09:43] While I can't speak from the perspective of a parent who wants to leave an inheritance, I can speak from the perspective of a child who may receive one. And my position is that I hope I don't get an inheritance. I hope my mom spends her money having grand life experiences and no regrets. While I do know of people who are counting on an inheritance as a part of their financial plan, that to me is a key indicator of someone who will squander generational wealth.

[00:10:13] That should do it for today. Have a happy rest of your day. And I'll see you tomorrow where optimal life awaits.