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In his more-than-30-year career, financial adviser Colin White has seen many “dark and twisted” family disputes over how adult children or grandchildren use the money they’re inheriting.
After spending a lifetime accumulating wealth or building a business, some parents and grandparents may be tempted to gift it to their beneficiaries with rules as to how the funds can be used.
“The desire of one generation to be in control over another is very, very common, and it leads to a lot of family discord,” said Mr. White, portfolio manager and chief executive officer of Verecan Capital Management in Halifax.
An estimated $1-trillion of wealth is expected to change hands between Canadian baby boomers and their children between 2023 and 2026 – inheritances that can be life-changing for many young people. But financial advisers warn that being overly controlling with inheritances can lead to long-term fractures in the family and can damage the beneficiary’s ability to manage money.
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Mary Clements Evans, a certified financial planner and behavioural finance expert in Pennsylvania, said she’s seen a fair share of her clients using money to manipulate their children or grandchildren into decisions they would not have otherwise made.
Some examples include stipulating that they’ll only pay for their education if they attend a specific university or a certain program, requiring them to purchase a specific house or even a certain car. She has also seen rules stipulating that the beneficiary can’t use the funds for contributions to a political party the parent doesn’t like.
“They want control from the grave,” Ms. Clements Evans said, though she noted that putting money in trust for a child’s general education or health care costs, or setting rules that allow a certain amount to be withdrawn per year to ensure the money lasts a long time, is “reasonable” and can be a form of financial education.
Mr. White said he has seen some clients offer money to a child or grandchild, but only if they use it to purchase a home. Although the clients’ intentions are good, the belief that home ownership is the be all and end all for creating wealth, “can be terrible financial advice,” he said.
“They’re not allowing the next generation to figure things out in the current environment … [and] the next generation has to take on all those responsibilities.”
He said the desire to exert control often comes from one of two places. The most well-meaning is a feeling on the part of the gifter that they know better than the next generation about managing wealth, particularly after having lived through major economic events such as the Great Depression or the 2008 financial collapse.
“In all those situations various strategies would have worked, but they might not now,” Mr. White said. “They want to protect the kids from making bad decisions and mistakes, as they see it.”
The “less altruistic” reason is the belief the next generation will be foolish with the family wealth or business. “That version of it is, ‘I created all this money … so you’re going to do it my way because you didn’t earn this,’” he said.
Kristine Anderson, founder of estate and family law firm Fern Law in Toronto, said trust structures allow for a great degree of control over how the beneficiary can use the money.
Many wealthy families will set up a family trust, list their children as beneficiaries and name three family members as the trustees – such as the mother, father and an aunt or uncle – who have a “lot of discretion” over whether to release money to the children, Ms. Anderson said.
“They can be as generous or as particular as they want, and there’s not a whole heck of a lot the beneficiary can do,” she said. However, in some rare cases the trustees could be considered to be breaching their fiduciary duty if they refuse to give money to one of the beneficiaries for “unreasonable” reasons.
In the case of trusts established after the parent or grandparent has died, the structures can have detailed instructions over how the money should be used, and can even extend well into the beneficiary’s adulthood. Ms. Anderson said she’s seen trusts that stretch until a child is 70, or for the rest of their lives.
She noted there are some options for a beneficiary to get out of a trust’s restrictive rule. For example, if a young adult wants to go to art school but the trust only allows for the disbursement of education funds if they enroll in a STEM program, Ms. Anderson said they could ask for court approval, and argue that releasing the funds would meet the basic underlying purpose of the trust.
In Ms. Anderson’s experience, those highly strict disbursement rules more often occur when someone is leaving funds for a family member they’re concerned about, such as a child who struggles with addiction or isn’t gainfully employed and has been overly reliant on parental help well into their adulthood.
“I think of it as a positive thing that the parent or grandparent, whoever’s leaving the money, can control the situation from the grave for the protection of the person,” she said. “I don’t really see it play out in a way that’s punitive to the kids.”
Mr. White said when he has encountered a client who’s looking to be highly restrictive with a beneficiary, he won’t share his personal opinion but will explain in detail the likely impact of structuring the inheritance in their preferred way.
He encourages clients to teach their children core money-management skills including the benefits of delayed gratification and how to live within their means, and then “trust them to make good decisions.”