Recently, a retiree approached me for investment consultation. The first thing she casually asked is if some money should be gifted to her 23-year old son out of the retirement benefits received. Her son had recently started his career in an IT company. This is not a standalone case. It is natural for parents to not just pass on their inheritance to their grown-up children after them. They also wish to share it with them during their lifetime. This could be in the form of land, house, commercial property, retirement benefits received, other financial assets accumulated, etc.
It would be unfair to pass a blanket judgement whether parents are mistaken in sharing or leaving an inheritance for their grown-up children. The question is where should parents draw the line? Even before having such sensitive conversations with their children, do they have a legacy plan? Have they taken care of their own income and healthcare needs first? Should they make such financial commitments as soon as they retire or receive some windfall?
Parents out of unconditional love and duty desire to share their legacy with children. But they may err in their approach, colored by their own protective instincts. While the genuine intent is to benefit the children, their blinkered view unfortunately may do more harm than good.
Let me narrate a real story. A couple inherited ancestral land and received a sudden windfall running into crores of rupees. At that time, their son had a small business which was doing okay. Even after the son got married and started a family, the parents were majorly supporting him from the inheritance received. The parents frittered away the money on their son by gifting him an SUV and funding his international trips. It was obvious that without his parents, the son could not stay truly independent on his own. This affected his aspirations and the hunger to grow. Consequently, he had a flippant approach and didn’t really harbor any major ambitions to exponentially grow his own business.
This is not an exceptional case. As land continues to be one of the most precious and expensive assets, the elder generation who bought them or mostly inherited them are today reaping the windfall, running into crores. Children are aware about this sudden change in financial situation and status. The casual conversations in the family sub-consciously add up to the expectations in their young impressionable minds. This financial security and the back-up anticipated to be provided by parents could discourage children to be ambitious and have a full-fledged career of their own.
As billionaire Warren Buffet popularly says – ‘When it comes to leaving your children money, the sweet spot is – enough money so that they would feel they could do anything, but not so much that they could do nothing.’
Further, in the case of siblings involved, expectations by children could sub-consciously lurk about equal distribution of assets from the parents. There are cases though, where parents are naturally inclined to give more to the child who is comparatively weaker or struggling money wise than the well-to-do sibling. This may give rise to family discord – both amongst siblings and with parents too.
One can have different perspectives on whether parents owe anything to their grown-up kids financially, after their education is taken care of. This depends upon the culture, family environment and personal equations. A lot also depends upon the capability of the children and how their lives eventually pan out as adults. All financial behavior though is rooted in the values and belief system which is inculcated in kids by their parents from an early age. Though there is no cookie-cutter approach to this, the moot thing to teach and guide children is about finding their own calling, putting in the desired efforts, develop a sense of purpose, become perpetual learners and independent. Education of course is the best gift parents can gift to their children. It is also important to foster a disciplined habit of regularly saving and investing in children from their early years of working.
Before passing on inheritance to or sharing it with children, it is important for parents to consider their own income and health care needs. Money for social causes and a second innings in a new career can also be considered. Understanding how big is the retirement fund and other estate is a step in the right direction. This will enable parents to assess beforehand how sharing it with the kids will impact their finances.
While passing on or sharing inheritance with children is a subjective decision, parents should not commit beforehand or indirectly set unreasonable expectations with their young children in the beginning. They should nudge their kids in carving out and treading their own path and have the confidence and trust as they do so. When kids grow up with the right attitude, values and a sense of self-worth, they understand the difference between privilege and entitlement. They are grateful for all the things their parents have to offer. Consequently, they see the inheritance as a bonus to their own personal net worth.