Whitney Houston’s unexpected death has put a new subject into common financial discourse. She planned to leave her 19 year old daughter with $20 million. Houston’s mother and sister-in-law say that amount is simply too much; it won’t keep up with Houston’s “intent to provide long-term financial security and protection for her child.”
At first, I thought I misunderstood – I thought they saw $20 million as too little money. Now it seems they think $20 million is just too much to leave a 19 year old.
Leaving Kids with Generational Wealth
As someone who expects to inherit absolutely nothing from my parents, I find the topic that you can leave your children with too much money mind-boggling. Start with the sum of $20 million – an amount that might seem paltry for most “trust fund babies.”
A $20 million trust fund delivered now in risk-free 10-year US Treasuries would yield $360,000 in annual income – enough to be at or near the top 1% without any effort at all. A 50-50 split of high-yielding equities (the Dividend Aristocrats) and 10-year Treasuries provides $410,000 in mixed income with the possibility of appreciation in the value of the equity holdings. (These returns could be further juiced with dividend dogs or mortgage REIT ETFs.)
Is $410,000 per year too much to leave your kids?
Making Kids Lazy
Warren Buffett famously says that he wants to leave his kids with “enough money so they would feel they can do anything but not so much that they could do nothing.”
- Is there anything wrong with doing nothing? Think about this conceptually. Most of us will work for years and years, just to have the least valuable years free to do whatever we wish. Retirement is an incredible thing, but face the facts: not many of us are going to retire super young. Those who do retire young make large sacrifices in their 20s, arguably the best years of life. What’s wrong with leaving your kids enough to do absolutely nothing to enjoy all of their years on planet earth?
- Leaving beaucoup bucks requires responsibility! The only people who benefit from an oversized inheritance are the people who make smart decisions after inheriting it. Either way, that money won’t be yours after you pass – it has to go to someone. Why not let your kids have the shot to keep it if they make smart decisions? After all, the only way to make a huge inheritance last for life is to allocate it intelligently. It’s survival of the fittest. Bobbi Houston has reason to clean up her act; she’s set for life so long as she doesn’t do anything stupid.
- It’s easier to work down from the top than up from the bottom. Life gives zero guarantees. The odds are good that a well-educated person who picks a good career path will do quite well, but nothing is as guaranteed as an income stream from an inheritance. Is there anything wrong with starting with the advantage of working from the top rather than the bottom? Working up from the bottom might be harder, but if it takes you to the same place, who cares? Does hard work really justify extraordinary wealth in a way that inheriting it does not? Last I checked, money spends the same regardless of its source.
- There’s more than money; there’s power. Warren Buffett won’t leave his kids with much, just a few million each out of a billion-dollar stockpile that could reasonably hit $100 billion before his death. Outside of their direct inheritances, he’s given his children $1 billion charitable trusts which must distribute $50 million each year. Buffett might not leave his kids with immense wealth, but he has solidified their position as very powerful philanthropists for generations to come. Buffett’s sneaky like that – his kids will silently join the ranks of the Rockefellers while Warren publicly decries large inheritances.
Imagine you’re sitting on a cool $20 million and you’re on your death bed. Do you leave it all to the kids? Would you purposefully give some of it away so that your kids have less?
Rates are low and opportunity is thin. Does the economic outlook today change the way you look at inheritances compared to the boom years of 2004-2007?