From Kiplinger · · 2m
Early Inheritance Trap
A $100K gift can backfire on adult children's financial habits.
In brief
A $100K gift can backfire on adult children's financial habits. Early inheritances may encourage impulsive spending or poor financial choices if not structured with conditions. Originally reported by Kiplinger.
The Early Inheritance Trap
Warren Buffett once advised parents to leave children enough to do anything but not enough to do nothing.
“Leave the children enough so that they can do anything but not enough that they can do nothing.”
Parental Gift Expectations
A Kiplinger and Morning Consult survey found 22% of parents hope adult children use inheritance to improve lives, not waste it.
“22%”
Early Inheritance Risks
An inheritance can lead to impulsive spending or unhealthy financial behavior, as seen in a hypothetical case where one twin quit a job to day-trade while the other bought a depreciating luxury car.
“one twin quit a job to day-trade, while the other used it to buy a luxury car that would depreciate over time”
Financial Planner Insight
Joy Slabaugh, a certified financial planner, explains that money can unintentionally interfere with motivation, identity, autonomy or family relationships.
“Money can unintentionally interfere with motivation, identity, autonomy or family relationships.”
Why Early Inheritances Backfire
45% of adult children prefer financial help now over a larger inheritance later, but only 14% of parents would prefer to give now.
“45%”
The House Money Effect
Unearned money tends to be treated more casually than a paycheck, leading to impulsive spending as people view it as the casino's money rather than their own.
“house money effect”
Incentive Trust Solution
An incentive trust releases money only when a child meets specific conditions, such as earning a college degree or matching income from a job.
“An incentive trust releases money only when your child meets certain conditions you've set”
Incentive Trust Conditions
Common conditions include a college degree, matching income from a job, or releasing money for a specific step like buying a first home.
“A college degree, matching income from a job, or releasing money for a specific step like buying a first home”
Trust Risks
Conditions based on salary, profession, marriage, or children can become unfair quickly, and rigid rules may not account for unexpected life events.
“Conditions based on earning a particular salary, entering a certain profession, getting married or having children can become unfair very quickly”
Financial Planning Advice
Start small with smaller gifts over several years to test how children handle money, or use Roth IRAs, 529 accounts, or direct tuition payments.
“Smaller gifts over several years can provide a useful test of how the child handles money”
The Goal
The primary goal is to help the next generation without enabling poor financial management or creating the expectation of constant financial support.
“The primary goal is to help the next generation, without enabling poor financial management, or creating the expectation that they will always be 'bailed out' by mom and dad”
The bottom line
Early inheritances may encourage impulsive spending or poor financial choices if not structured with conditions.
