Ever wonder why these billionaires like Warren Buffet and Bill Gates decide to leave peanuts to their kids? Yes, me too. These people are worth billions of dollars and still rather leave all that wealth to non profit institutions.
Warren Buffet is worth $72 billion. 99%, he said, he will give it away to charity. Only 1% he will leave to his kids. You do the math. Even 1% is a lot of money. But why he decides to do this? What is going on here? Something does not make sense.
Now, we are no dummies. We know that Uncle Sam is coming after you and wants his cut after you go to heaven. In 2020, if you go to heaven and you leave your children less than $11.58 million then you do not have to pay an inheritance tax. Basically a transfer tax. However, if you leave your children anything over this amount you have to give it to Uncle Sam at 40%.
40%. That is a lot of money in taxes. Let’s do the math. I know, I know. Not many of us will leave anything over $11 million to our kids. But just in case. Here is the math of how much the U.S. Government or the U.S. Treasury will get from you.
As you can see, if your net worth is less than $11.5 million you do not have to pay a dime. But if your net worth is $22.5 million then you give the government a check for $4 million – ouch! What about if you are Buffet and your net worth is over the $1B over the limit? Yes, you have to sign a check for $400 million, yes million dollars to the government. Really? We are in the wrong business. The government is where the money is at.
Hence, the reason why most super wealthy folks decide to just give the money away to charity or some other noble cause than to just give it to the government to waste.
But of course, not all of us will have to face that problem. At least not me. I am shooting for $10 million net worth. But let’s get back to the subject of the post. Which is our children. Should we leave them an inheritance or not?
This is the question that most wealthy folks asked themselves all the time.
The trouble with leaving money to children once they are adults is that they usually do not appreciate it or see the value in protecting it. Since they have just received a nice check and they have not worked hard for it. It is the equivalent of giving it to the government. Handouts.
I remember when I was in college. I had some friends who were super rich. One of them would throw parties all the time at her parent’s house in Georgetown, a high-end neighborhood in Washington, D.C. They had a mansion that was so well hidden that you would not know it was there. She would spend money left and right and really just did not care about it. I was able to see how children can just burn daddy’s money like there is no tomorrow. We had a great time, I can tell you that. I wonder what happened to her now. We lost touch but I am sure she is probably still partying as an adult and burning her parent’s money.
I have a five-year old girl. My princess. And I wonder some times. Will my baby girl burn my money like my friend did back when I was in college? Ouch. Just the thought of it scares me.
Trouble ahead I can tell you that. The other day I was looking at my investment portfolio in my phone and I was telling my wife that the market was doing great. This was in June when the market really took off. We were having dinner and I said to my wife, “look, it’s all green.” My eight-year old son is right there next to my five-year old daughter, when my daughter said, “Good daddy. It is all green so we can go shopping.” Oh no. I did not know what to say. I just looked at my wife and we both smiled.
That is the concern that I have with leaving wealth to your kids. Specially if they do not know how to deal with money.
Here is a few things that I plan on doing to make sure my kids do not become spoiled kids.
Engaged
Get your kids engaged in finances and money management at a young age.
I took my son to New York in December, before the Covid-19, thank God. My wife and daughter were out of the country. So I told my son, well the girls have left us, let us boys take a trip. I told him I was going to take him to a special place. A place that means a lot to me.
We drove to New York City and stayed there for the weekend. I took him to Staten Island to see the Statue of Liberty but really what I wanted him to see was the Financial District. We took pictures in front of the Stock Exchange and walked around Wall Street. We got up on top of the bull and took some photos. I gave him a brief history and why we were there. I told him that I was there many years ago when I got into the stock market. Now when he sees the stock market, hears the opening and closing bells or sees me analyzing stocks and bonds, he knows what it means.
We did make another trip with the girls. But they were more interested in shopping than going to ride a bull. Oh well. I have to wait until my daughter is a bit older to teach her about the stock market. But now I know where she got the, “is green, we can go shopping” phrase from.
Business
Teach our kids about business and how to generate income, most importantly passive income. I bring my kids to my business every so often so they can see what we do. How we earn our income and generate wealth. Get them to think about using their brain and intelligence to get solutions. I know, my kids are still children. But it is important they learn how the economy and the financial world works.
I had my son pick a few stocks when we went to New York. One of them is Amazon. Then Covid-19 hit right. You know what happened to that stock right? Well, I can tell you he will be a good investor. He has that stock in his Trust account. Unfortunately, the 529 can only do mutual funds, which is not bad. Up about 20% but not close to a stock position.
Education
Your kids must understand that in order to make it in life you need education. You can’t only go so far with a high school diploma. Plus, by them attending college and getting a sound education, the likelihood of them becoming irresponsible or getting in circles in our society that are not healthy diminishes.
Don’t judge me. That is the reality of our society in any country. Even our greatest country in the world. If you are uneducated you will be discriminated against. Period. It has nothing to do with skin color. Why do you think the wealthy move to better neighborhoods. It is a legal way to discriminate. Someone earning $20,000 a year no way can afford a house in a neighborhood that is worth $2M.
Rich Marry Rich
It sounds bad, I know. But in some parts of the world, arranged marriage is just this. A way to protect the wealth from getting to a poor family who will burn it like there is no tomorrow.
You can call this discrimination and often you hear people complaining that the rich think they are better than us or the rich always treat us like trash or the rich marry only the rich.
Here is where you can protect or minimize the risk of your kids marrying someone who will just what the money. Gold diggers if you will.
I remember seeing a program on TV about a German con man in New York who was able to marry a bright, talented, Harvard-graduate beautiful girl. He fooled her. He told her that he was a Rockefeller and that unfortunately they did not like him and had removed him from the family fortune. He told her his name was Clark Rockefeller. It was all a lie. His really name was Christian Gerhartsreite. He was also a murderer who had killed a couple in California years before when he posed as a British baronet and he went by the name of Christopher Mountbatten Chichester. Anyhow, Sandra Boss, was making $1 million a year when she met him. Nice introvert, Harvard-educated financial lawyer but fell to this crook. They stayed married for a decade and had a child.
Here is the link to the story if you want to read it.
https://www.npr.org/2011/07/10/137624164/30-year-con-from-german-kid-to-rockefeller-scion
This is the reason the rich marry the rich. They do not want these characters targeting your family so they can get rich overnight.
Make sure you talk to your children about the importance of the people they make friends with. It is important they know the family well and that they come from a good family. A family that has strong moral values and honor. And if they come from money, it helps too.
Again, this is why the rich live in rich neighborhoods. To minimize the risk of their kids marrying the poor or getting taken for a ride like this Christian character.
Do Not Stress
There is no point in stressing too much. If you are able to leave some of your wealth to your children, great. If you are not able to leave much, that is fine too. At the end of the day, your kids will learn more from building wealth and creating their own journey than having dad and mom telling them what to do.
I think it is more important that you spend your money and enjoy life. Live well. Travel and pamper yourself. Of course, do not go crazy and burn all the money either. I say if you are able to leave your kids one house each in a nice neighborhood and pay for their college education, you are set.
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Sincerely,
The Economy Chief
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