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Oct 1, 2015

Leaving It To Your Children Or Charity?

by Ken Finkelstein

Ken FinkelsteinThe story plays out in Britain with the elderly King Lear deciding how to apportion his riches among his three daughters. The largest stake, he determines, is to be given to the child who vows to love him most. In answer to the King’s variation of ‘How do I love thee’, the two wicked daughters, Goneril and Regan, play the flattery game; lavishly and falsely declaring love for their father. Cordelia, the third daughter, modestly and truthfully states that she loves her father as any daughter should. In reaction to this uninspired answer, the narcissistic King erupts, disowns Cordelia, and transfers his wealth to the deceitful Goneril and Regan.

Shakespeare penned this piece sometime around 1604. In the ensuing 400 odd years, family dynamics as it relates to estate planning, is no less of an issue. As the lights come down on the Greatest Generation, i.e., those who grew up during the 1930s and 1940s, economists are predicting an inter-generational asset transfer valued at approximately One Trillion dollars during the next 20 years.

Shared Values

As a cohort, this generation benefitted from shared values that included living within their means and frugal spending habits. And when it came time to retire, they had socked away a reasonable amount of personal savings to supplement Canada Pension Plan (CPP), Old Age Security (OAS) and, if fortunate, corporate pension payouts.

Their children, however, the Baby Boomers, seem to have adopted other priorities. Eschewing thrifty living for the gospel of consumerism, Boomers have earned themselves the title of most indebted generation. Ever. As the bulk of this generation shifts to idle, many have relatively little in the way of savings: forty-three per cent of Boomers fifty-five and older have saved less than $25,000. Sure, monthly CPP and OAS cheques will help once the requisite age is reached, but government support combined with meagre savings may not be enough to stay out in front of the poverty line.

Why are retirement savings so low for so many people? Owing to the high cost of living, is there nothing remaining after expenses? Not having a company pension, have poor investment decisions and/or high management fees reduced personal savings? Is the plan to forego traditional retirement and earn a living until the fateful day arrives? Is a monastic lifestyle in the cards, wanting/needing little in the way of material comfort thus able to subsist on less income? Are advancing years too frightful to face, better to deny mortality and forgo planning for the day when work is no longer an option (‘… so I’ll continue to pretend / my life will never end ...’ - Simon & Garfunkel, Flowers Never Bend With The Rainfall)?

Another reason too prevalent among Boomers: they are depending on the Bank of Mom and Dad to pay off their mortgage, other debt, and fund retirement. Talk about a risky plan! The thing is, as the individual lifespan extends, more people keep on ticking well into their 80s, 90s, and, increasingly, past the century mark. Hand in hand, living expenses continue for longer periods, and these may be substantial (i.e., retirement residence, care home, caregiver, medication). And payment for these expenses typically comes from savings, eating into intended inheritances. The result? Smaller pies divvied up among Boomers who themselves may be into their 60s, 70s and even 80s before a helping arrives on their plate. 

Windfall Dangers

But let’s say that an inheritance is received when healthy and relatively young. So one day you have minimal savings and a 9 to 5 job, and the next day you receive a six or seven figure inheritance windfall that is not the end result of slaying your sister and plotting your father’s demise (but I digress to King Lear once again for reasons no other than it is summertime as I write and what city isn’t staging Shakespeare outdoors?). What happens after you take delivery of the money?

Inherited wealth is double edged, bringing with it benefits and curses that trigger an array of feelings. First comes disbelief associated with the death of a loved one. Anger follows resulting from thoughts of existing without one or both parents, feeling abandoned and isolated. Once anger passes, euphoria moves in, a sense of freedom, of not belonging to a parent, being your own person, together with making plans for using the money. As always, euphoria is a temporary state and here it is supplanted by guilt, not surprising given that the heir benefits financially from the death of a loved one. Guilt is alleviated through varying bargaining devices, such as the recipient telling him/her self that they will use the money to positively contribute to their community or in other compassionate ways. When the heir is able to move past guilt, they have arrived at a place of acceptance and determined themselves to be worthy of the gift.

Even if you’ve inherited a windfall so large that your money worries have vanished, and judged yourself a suitable heir, you’re still not necessarily out of the woods. Your concern turns to protecting the money, growing the money, planning for its use, and devising tax efficient methods of transferring funds to the next generation. However, if this becomes a daily conversation, if the emphasis on dollars and assets is such that families neglect cultivating social, intellectual and spiritual connections, the result being that family relations sour, then the heir has allowed the inheritance to do more damage than good.

Also capable of inflicting harm is arrogance and entitlement. Descartes said, ‘I think therefore I am.’ Although no one worth their salt ever said, I have money therefore I am, this attitude may be an unfortunate byproduct of wealth. It can happen to those who inherit money just as it happens to those who are rewarded with money for their work, such as the prima donna actor who demands to be treated like a King or Queen simply because they earn ridiculous sums of money. It’s a destructive mentality, one brought on by feelings of low self-esteem and self-loathing, one that ruins relationships, one that may be an unintended consequence of a bequest. The moral of the story: while the balance sheet may balloon upon receipt of an inheritance, equilibrium and good health are best maintained by avoiding ego inflation. 

Reflect Before Giving

Given the potential problems looming for beneficiaries, maybe the 99% should follow the lead of Bill Gates, Warren Buffet and others who have subscribed to the Giving Pledge, in which they commit to give most of their fortune to philanthropy. As of August 2015, one hundred and thirty-seven billionaires or former billionaires have signed the pledge.

Bill Gates said that, “Money has no utility for me beyond a certain point.” Granted, given his means, and his $150 million (USD) lakeside estate, that certain point is set higher for Bill Gates than for the rest of us. Still, regardless of your financial worth, the takeaway is to consider your view on the meaning of money, what is its purpose, and in this context reflect upon how much you are leaving for your heirs and why.

For Warren Buffet, the perfect amount to leave children is “… enough money so that they would feel they could do anything, but not so much that they could do nothing.” This is a common concern among successful entrepreneurs: the prospect that large inheritances will encourage their offspring to do nothing useful with their lives, that it dilutes motivation to find satisfaction through work and to contribute to society, thus acting as a corrosive on self-worth and general well-being. A student of history, Buffet surely knows of William Vanderbilt, 19th century heir to his grandfather’s fortune, who said, “inherited wealth is as certain death to ambition as cocaine is to morality.”

Lasting Legacy

How much to leave to your children is a subjective issue, one that deserves to be wrestled with before finalizing estate documents. When batting ideas back and forth, consider talking directly with your family about your intentions, explaining your values and why you are choosing to give, or not. For younger heirs, most advisors agree that large sums given to people under thirty who have done nothing to deserve the money almost invariably tends to corrupt. Instead, place funds in a trust, with interest payments made after age thirty-five and access to principal at age 40. Whatever age your intended beneficiaries, what’s most important is to remember that it’s not all about what you leave behind. Rather, meaningful impact is made while you’re alive, in terms of the gift of caring, friendship, love and support. These are the true markers of giving, of leaving a lasting legacy.

Ken Finkelstein, LL.B. J.D., Private Equity Strategist, Sitka Management Corp. (250) 507-6175,,