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Raising responsible, well-adjusted children in an affluent environment can be challenging to any parent. The line between enough and too much may vary considerably from one family to another. Fortunately, informed guidance and good practices can help children become responsible stewards of personal and family assets.
“Wealthy parents may be tempted to think ‘I buy my children what they need, and that’s sufficient,'” says Jon Gallo, co-author (with his wife, Eileen Gallo) of Silver Spoon Kids: How Successful Parents Raise Responsible Children. “But children in affluent families may need help learning how to spend and invest money in responsible ways.”
Here are six ways experts suggest to head off dangers that can imperil children.
1. Assess your own views about money
Ask yourself these questions:
cWhere do I find the balance between work and leisure?
cWhat does extravagance mean to me?
cDo I believe that possessions convey status?
cDo I financially support charitable causes that matter to me?
cWhat spending limits and savings goals are appropriate for my children?
cWhat is my financial risk tolerance?
2. Talk with children about money
Families seldom speak candidly about money. Be proactive and discuss limits before situations that can cause friction arise. Encourage children to set spending limits for themselves. Explain why you find certain behaviors wasteful or, conversely, why you believe a cause is worth supporting.
3. Give them a stake and put them in charge of it
Begin giving children an allowance as early as age 5 or 6. By doing so, you will be laying a foundation for them to learn about the value of money. Encourage your children to save some of their income, perhaps by matching a portion of their savings.
4. Encourage children’s participation in family financial decisions
Invite school-age children to participate in family discussions about money. Through their participation, they will learn how to evaluate the relative merits of one kind of investment versus another. If you have your own foundation, enlist their help in researching charities and in making grant recommendations.
5. Teach Investing Basics
Enlist the assistance of your Financial Advisor and organize a hands-on investment asset allocation seminar for your adult children.
Jon and Eileen Gallo helped create such a seminar for one family, which included three adult children who knew next to nothing about investing. The parents set aside approximately $75,000 in a brokerage account. Each adult child was charged with the job of investing a portion of that money for one year under the supervision of the Gallos and other family financial advisors.
“There was the chance they would lose money-but the family could afford such a loss,” says Jon Gallo. “Meanwhile, the kids learned lessons that could help them preserve their inheritance later.”
6. Transfer assets gradually
As children grow older, you may want to slowly start giving them money of their own to manage. Current federal law lets individuals transfer up to $12,000 per year to an unlimited number of people free of gift taxes; couples can jointly give up to $24,000. Another mechanism that can be used to transfer assets to children over time is a trust.
Trusts can be designed to distribute money incrementally-for example, income at age 21, and then a percentage of principal distributed at ages 30, 35 and 40. Ideally, as children gain experience in managing the income they receive from the trust, they will be better prepared to handle the larger principal payouts when they are distributed.
Financially savvy children will benefit from the lessons you’ve learned through the years, which have enabled you to provide your family with a comfortable lifestyle. With proper guidance, your children can become capable custodians of the family’s wealth, which will benefit future generations in the years to come. For more information, please contact Taylor Easley or Dale Suezaki at 329-7979.
Articles are published for general information purposes and are not an offer or solicitation to sell or buy any securities or commodities. Any particular investment should be analyzed based on its terms and risks as they relate to your specific circumstances and objectives.
Morgan Stanley does not render advice on tax or tax-accounting matters. Clients should always check with their tax and legal advisor before engaging in any transaction involving IRAs or other tax-advantaged investments. This material was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws.
Investments and services are offered through Morgan Stanley & Co. Incorporated, member SIPC.