How much should you leave to your heirs?

In the asset management world, there is always some discussion on how you can maximize what you leave behind to your heirs. We all want to make sure that Uncle Sam gets the minimum amount of your hard-earned wealth upon your demise. Fair enough.

I think too much emphasis goes into squirreling away your money into various protected vehicles.  Cash value insurances. <shudder> Trust funds. Step-up basis. Sure, these opportunities are worth knowing about, but the main question about all of this is who in this world should benefit from your financial prowess? And how much is enough?

Leaving religion aside, one has to realize that you can’t really take any of this to the grave. Anyone other than yourself will get your wealth. Most people are going to give it to their kids, grandkids, relatives, and charity. I’ve seen this in my closer friends. It’s an interesting phenomenon to see on the outside.

Middle class inheritance.

I have a friend who lost her parents a few years ago. Her family was a quintessential middle class family. She worked as a manager in a local small business. No one in the family had professional degrees, but they all managed well. All of the siblings ended up splitting the savings accounts and the house. As I recall, each recipient received on the order of $100,000 total.

I would take a windfall over nothing on most days, but you realize that an amount like this isn’t going to allow anyone quit their day job. Taking all of this in cash all once would probably trigger a relatively sizable tax amount for the average American too.

I’d want to take back my loved one any day in this situation.

Upper class inheritance.

I have another distant colleague whose parents were in some shipping business. She is a general surgeon who doesn’t seem to practicing medicine anymore (I don’t know her that well, but she stopped after having kids).  Her husband was “in the finance industry”. Now, it was no surprise based on her lifestyle during medical school that she came from serious means. Nice clothing, furniture, apartment, and vacations. If I were in her shoes, I might not have even had the ambition to go into medical school, yet alone become a surgeon. When her mother passed, I recall that people spoke about “serious amounts of money” in the inheritance. Not sure what that means, but the people who spoke about it were all doctors, so I would assume that these amounts were big in my book too.

Thanks to Facebook, I now see vacation pictures from their family almost every other month. They have a nice home in the Bay Area that recently sold for nearly 8 figures.  I think that they are all happy.

How much money are you planning to leave on the table after you’re gone?

Windfalls and their impact on your lifestyle.

The easiest way to ruin any person’s self-initiative is to give them a crazy amount of money before they have established their careers. In this regard, it’s probably a good idea to set up a trust fund if you end up having significant wealth to leave behind.

Fortunately (or unfortunately) most of us will never have enough excess money to ruin someone’s life. But we should consider whether leaving an inheritance should be part of the investment equation. My strategy is as follows:

  1. Work hard and save as much as you can before you have dependents.
  2. Continue to work hard and instill work ethic into your dependents or mentees.
  3. If you are able to contribute to others’ well-being, do so. Invest in their education and work ethic.
  4. If you have excess after helping out your family and friends while you are still alive, consider the charities that you have left out.
  5. Leave behind what amount you feel is adequate after you’re gone.

That’s it. Simple and sweet. If you hustle enough in your working years to fall into the trust fund level, congratulations. You’ve gone above and beyond. Otherwise, there are more pressing matters to deal with in your lifetime.

(Photo courtesy of Flickr)

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  • Good advice here.

    And a topic that I ponder often (though still without answers). Adding those of us coming from ‘low means’ to the topic makes it more difficult for some (myself included). I come from a low-SES family. Years later — saved well, educated well, employed well — it’s a real dilemma, still. We’re relatively FIRE already and still in our 40s. I expect that we will work another decade or so, mainly because we enjoy our profession/business. This last decade of savings is likely what will get our savings to a level that will leave a good bit (7-digit) to our daughter. What I don’t like to admit is that our motivation is mainly ‘fear’ — fear of a loved one having to struggle. Admittedly, I’m bothered by the popular ‘I’m not leaving anything to my kids’ argument that we see often in pop culture. I wouldn’t wish the difficult climb out of poverty on anyone. That said, I do 100% agree with the ethic aspect that is needed (and often not evident) in the the middle/upper income levels . . . again, a great read!

    • Smart Money MD

      Thanks for stopping by! I agree, it’s not easy to decide how much is an acceptable amount to leave to your kids. How much we ended up inheriting ourselves can also impact how much we think we should leave behind as well.

      I (unfortunately/fortunately) won’t be inheriting much of anything from my family, and had also never expected to get anything as well. I have actually had to contribute a moderate amount of my income towards medical bills for the parents as well. I think that having to struggle through some of these situations has taught me to become more self-sufficient.

      Hopefully the next generation will learn the same skills as I did.

  • It’s so hard to know what we might end up having to give away. Plug some numbers into FIREcalc and we might end up with less than we have now or 10x as much.

    I hope to see my kids financially independent on their own, so I don’t anticipate them needing the money, but they could very well end up with some. Charitable causes may also be beneficiaries of any riches we have later on — I’d probably give away most while we’re still alive to see the benefit ourselves.

    Best,
    -PoF

    • Smart Money MD

      If most of our assets are in the stock market (mine currently are), we’re going to see a wide range of where we’d end up. Given that the stock market historically will go up more often than not, we ought to end up okay in the end. However, the fact that our assets could end up significantly lower than anticipated has gotten me wondering of switching over to fixed assets that allow for cash flow or even real estate with cash flow as a means to have retirement income when I truly decide to hang up my hat. I have up until this point (and still am) decided that I don’t love real estate enough or found adequate time to educate myself adequately on real estate investing. Food for thought.