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By Richard J. Buoncore
October 27, 2015

Parents with first-generation wealth are concerned about telling their children too much too soon about their future inheritance. They worry that their children might lose the incentive to work and achieve their own successes—a valid concern.

But, even before that, successful people can make bigger mistakes by not providing their children with a solid foundation of the skills needed to responsibly handle their inheritance. If children are never taught how to manage money, it’s more likely to evaporate because of mismanagement. First-generation high-net worth families need to provide their children with sufficient knowledge to responsibly handle their inheritance.

So what should you tell children about their future wealth and when? What should you say about how much they may inherit?

Here are some insights I’ve learned.

There are no right or wrong solutions, since it comes down to what is comfortable and appropriate for each individual family. The challenges include how and when to start the conversation and how to engage their children in inheritance education on subjects like taxes, estate planning, risk management, philanthropy, and capital markets.

A natural opportunity to initiate this conversation might be when a young teen gets his or her first summer job and first paycheck. It is a big moment for most young people, bringing with it a sense of independence and achievement. But it can also carry with it the shock of seeing part of their income eaten up by taxes. This creates a natural opening to start the education process, since taxes will be a factor all their lives.

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A summer job also represents an opportunity to talk about saving and budgeting. One approach I have discussed with clients is that they tell their children to save half of their summer paycheck, then match the amount the child saves to create an investment account.

A child should also meet with one of the family’s financial advisers, find a few stocks which interest him or her, and begin investing. In choosing investments, the child can begin to learn firsthand about the stock market and how companies are valued. He or she will also get an introduction to the inherent risks and rewards of the stock market. Watching a stock go up—or down—can be a quick, powerful education in how the market works.

These first lessons are critical, but they are only the beginning of an ongoing educational process. As children grow older, the education should continue. Most often, I have seen estate plans disburse to the next generation over time at designated ages. It goes back to education and working through a process like grade levels. While Inheritance 101 may be the first paycheck, Inheritance 403 may come after many years of working and establishing a career. In those early adult years, heirs will begin managing much more than a paycheck. Their sophistication will grow as they start dealing with taxes, 401(k)s, insurance, and maybe even a mortgage. They will truly understand the responsibility of inheriting their parents’ wealth once they have started managing their own.

With more sophisticated understanding and continued education, children—now adults—will be well equipped to know what they will inherit and how to manage it, for the benefit of many generations to follow.

Rick Buoncore manages money for high-net worth individuals and their families. He has more than 30 years’ experience in capital market investing. He is managing partner of MAI Capital Management, based in Cleveland, Ohio. MAI had $3.7 billion in assets under management as of September 30, 2015.

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