A few years ago, when I was meeting with a couple who were considering retirement, it became clear that the biggest hurdle that stood in their way was the continued dependency of their adult children. Even though the children were well into their forties, they were still consistently asking their parents for money. This was such a persistent issue that this couple had actually withdrawn money from their retirement plans to support their children.
Luckily, there was a pension to augment their retirement savings; otherwise they would have been forced to continue working. Both spouses were not in the best of health, and working well into their seventies did not sit well with them. I strongly encouraged them to delay retirement, wean their children off economic assistance, and save more while they could.
Looking back, they are in a much better position now, because they took these hard but necessary steps. As is often the case, we may risk losing business by giving advice that's good but unpopular. However, the road less traveled is often better in the long run for our business and our clients.
Whether they are socialites or feel they are entitled to a never-ending string of handouts, some adult children never develop into “economic adults.” I have found over the years that those clients who consistently work to raise their children as independent, productive members of society often teach frugality, gratitude, and individual productivity. Many feel that one of the best ways to ruin their children is by giving them too much without letting them enjoy the fruits of their own labor.
Our clients want to protect their offspring from the dangers of inheriting too much, undisciplined spending, and today’s overly litigious society. Many financially independent adult children do not plan on inheriting any wealth from their parents. When and if they inherit a more substantial sum, they’re better prepared to handle it having been faithful with their own savings. I encourage our clients to take care of themselves, their church, and charities first. The most important things we can leave our children are values and skills that empower them to achieve independently. Paying for education, providing seed money to start a business, or anything encouraging financial responsibility can be beneficial.
Increasingly, we’re advising clients to utilize trusts and family foundations to ensure their wealth is spent most responsibly. These entities provide safeguards for adult children with protections from themselves and those who might be in a position to take advantage of them. My personal family trust and many of our client's have provisions where children may withdraw funds for education, medical needs, and basic support. Additional funds are available to the extent they can provide for themselves.
How do we protect against future spouses, business partners, or litigious opportunists taking advantage of our adult children? Revocable trusts established today can become irrevocable trusts when one spouse passes away, protecting the survivor from financial vultures. Irrevocable asset protection trusts serve as another vehicle to protect client interests if threats are more immediate. For those donating significant amounts to church or favorite causes, charitable trusts can provide substantial tax savings.
The Spanish have a saying: “Father merchant, son gentleman, grandson beggar.” We in America express the same thought as, “Shirtsleeves to shirtsleeves in three generations.” Only by understanding the root cause of the problem can we work to develop a plan to thwart this common malady.
Joe Franklin, CFP, is founder and president of Franklin Wealth Management, a registered investment advisory firm in Hixson, Tenn. A 20-year industry veteran, he also writes the Franklin Backstage Pass blog. Franklin Wealth Management provides innovative advice for business-minded professionals, with a focus on intergenerational planning.