Best ways to pass assets to children

  Hellen Njeri

Recent deaths of Tanzanian billionaire Reginald Mengi and Safaricom Chief Executive Officer Bob Collymore have rekindled the debate over how super-rich people are supposed to pass their fortune to their children and grandchildren – if at all.

While some wealthy parents want to leave money to their kids, but are worried that too much will rob them of the ambition and hard work that enabled their parents to amass the wealth, others like millionaire Kevin O’Leary’s do not plan to give their kids any of their wealth.

“They know when their education is over, I’m pushing them out of the nest. I tell wealthy parents that if they don’t kick their kids out of the house and put them under the stresses of the real world, they will fail to launch their lives,” he told Chatelaine, a Canadian women’s magazine, in 2013.

As for how much to pass on to kids, self-made billionaire Warren Buffett once offered a good rule of thumb: The perfect amount to leave to your kids, he told Fortunein 1986, is ″enough money so that they would feel they could do anything, but not so much that they could do nothing.″⁣

If you are among the individuals thinking of leaving a tidy sum of money to those they love here are some tips to make the process easier, according to family wealth experts.

1. Give your kids a financial test

If you are married, both of you can give a certain amount say Sh2,000,000 each depending on your net-worth. Gift your children money without any restrictions or rules and then sit back and watch what happens. How will your children, for instance, handle a Sh1  million inheritance? Why don’t you see what they do with Sh500,000 first? Do they save it? Do they ask for help? Do they pay off debt? Do they blow it in clubs?

2. Tie distributions to ages and events

Think back to when you were 20 years old. Would you have been emotionally and intellectually mature enough to handle a large inheritance? Many parents create their trust so that their kids get a small amount of money each year and larger amounts when they reach certain ages (e.g., 30, 35, 40).

They will also allow for trust distributions to pay for college expenses, weddings, or house down payments. A popular strategy is to distribute income from the trust assets when the kids are young and then to distribute principal when they are older and, ideally, have a career and greater financial sophistication.

3. Talk over your estate with loved ones

Although you generally are not legally required to give your money and other assets to your children, it may be a good idea to communicate to them what assets you will leave behind (as long as they are old enough to understand). You do not need to tell your children about everything that you own or even go into great detail, but discussing large assets they know about, such as the house they grew up in, can be wise.

4. Give without giving cash

There is another win-win alternative to outright gifting. Jeff Lewis, a US estate planning attorney likes this approach. Lewis says, many of his clients have started using their annual federal gift exclusion to directly pay down either an adult child’s mortgage principal or school loans. This will make a significant difference to the child’s future financial position, while not putting that amount of cash in their hands today. Many parents realise that mortgages and school loans are substantially larger now than in their time, so helping to reduce that huge burden is a rewarding proposition for both generations.

5. Make sure they know your values

Some people may not plan to leave all of their money to their kids, instead opting to leave some or all of it to charities or other causes that are important to them. The most important legacy they can pass on to the children are their values. They need to make sure that part of the conversation with their kids is about those principles—no matter how you divvy up the family asset.

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