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Feb 7, 2020

Knowing When To Shift Gears - How To Maximize Happiness For Your Heirs - Part Three

by Warren MacKenzie

Warren MacKenzieThere is a Harvard study of 4,000 millionaires and the conclusion is that in most cases both children and parents will have happier lives if the parents give their money away and let the children make it themselves.

In a Marist poll they compared the reported level of happiness with a group that had an income of $10,000 and another group that had an income of $50,000. In this case, those in the group earning $50,000 were clearly happier. They also compared a group that earned $100,000 per year with a group that earned $1,000,000 per year. With these two groups there was no significant difference in the level of reported happiness. The conclusion is that once people get out of poverty and have a basic level of income, additional income does not significantly increase happiness.

Andrew Carnegie said, “Why should men leave great fortunes to their children? If this is done from affection, is it not misguided affection? Observation teaches that, generally speaking, it is not well for the children that they should be so burdened”.

He also said, “A man who dies with a large estate dies disgraced”.

We need to understand what factors contribute the most to a happy life. In the following list there is no mention of inherited wealth.

  • Family and friends
  • Accomplishments
  • Accepting responsibility
  • A good work ethic
  • Self-confidence and self-respect
  • Overcoming challenges
  • Having problem-solving ability
  • Being successful at life
  • Helping other people
  • Spiritual completeness

We all want our children to be strong, to have accomplishments, to have self-confidence, to be able to solve problems, to overcome challenges and to have a happy and productive life. To have a happy life it’s important to have experience in dealing with problems and challenges, because there is no such thing as a life without problems and challenges. As we know from the history of lottery winners, sudden wealth does not solve all problems; it just gives the newly wealthy individual different problems and challenges.

The German philosopher Frederick Nietzsche may have said it best. “What doesn’t kill you makes you stronger”.

Wealth can’t solve all problems because we can always imagine a bigger house, or more exotic vacations and then we have another unfulfilled desire and unhappiness.

All unhappiness comes from unfulfilled desires. It doesn’t matter what the desire is for. It could be for a larger yacht, for better investment returns, for better health or for world peace. Wealth can’t solve all problems because we can always imagine a bigger house, a better spouse, or more exotic vacations and then we have another unfulfilled desire and unhappiness. So instead of hoping that a larger estate will give heirs happiness it is better to give them the skills to face challenges, to solve problems, and to make their own accomplishments.

Abraham Maslow developed a hierarchy of needs triangle. At the base we have physiological needs, then needs for safety, then a need for love and belonging, then self esteem, and finally for self-actualization. Money is needed to cover the needs at the bottom of the triangle but more money is not what our children or grandchildren need to satisfy their higher level of needs.

But to the extent that parents do want to transfer wealth to their heirs:

  • They should know that 70% of wealth transitions fail. (Forbes Quote).
    • As Tom Deans points out in ‘Willing Wisdom’, a history of honest communication is the key to a successful transfer of wealth.
    • Regular family meetings are a key to a successful transfer of wealth from one generation to the next generation. This is particularly true when sons-in-law and daughters-in-law are involved.
    • Parents should aim to create a family identity—this is who we are. This is what we do. Philanthropy can play an important role in establishing a family identity.
    • There are benefits for the inheritance to be a fixed amount (with the heirs knowing the amount so they can plan their lives) versus leaving the residual which will be an unknown amount. (This is easy to accomplish by using tax-exempt permanent life insurance). The probability of a dispute over the estate is lower when heirs have been left a fixed amount (and they receive it) than if they are all left a percentage of the residual. The residual can be left to the family’s favorite charity.

In his book Values Based Investing – Scott Fithian says, “Leaving no money but passing values to heirs is acceptable. They likely will manage their lives very well. Leaving money and also passing on values to heirs is usually a positive situation. They might just change the world. Leaving money to heirs who have poorly developed values is asking for trouble.”

We all want our children and grandchildren to be happy. Someone once said we can only be as happy as our least happy child. But we can’t give our children happiness; this is something they must achieve on their own.

The best thing we can do for our children is to give them values, self-confidence, a good work ethic, and the skills to overcome challenges and practice in solving problems. We don’t want our children to be like snowflakes and melt when faced with their first difficult challenge.

Introducing children and grandchildren to philanthropy has a number of benefits:

  • They get to experience the joy that comes from helping others.
  • Young people are naturally idealistic and getting involved with philanthropy allows them to develop this positive character trait.
  • They become less self-centred. This is good because self-centred people are generally not well-liked.
  • They get an opportunity to meet and interact with people of good character.
  • It’s a chance for communication within the family and it helps create a family identity.

In Summary:

Based on my experience I know that many retirees lose an opportunity for increased happiness for themselves and their children because they’re not using their capital wisely. These retirees are still focusing on managing their capital wisely (and this is important, but it’s not enough) they should also have a plan to use their capital wisely.

To use capital wisely – they need to be clear on their long-term goals and they need an Essential Capital/ Surplus Capital™ financial plan that shows whether or not they have more than enough to achieve their goals. If they have a surplus they need a plan to use it wisely. It’s a mistake to think that leaving more will necessarily increase the happiness of one’s heirs.

We should accept the fact that it is difficult or impossible for our children to have a lifetime of happiness unless they’ve learned how to deal with challenges and how to solve problems.

Getting the family involved with philanthropy is an excellent way to establish the values that may lead to greater happiness for parents and children.

Warren MacKenzie, CPA, CA, CIM – Head of Financial Planning at Optimize Wealth 416 979 3820.