Helping Your Children Be Trust "Worthy"

By Alan Goldfarb, CFP^®, AIF^®

The problem of raising financially responsible children is compounded when children receive trust funds. An inheritance can seem like a windfall, especially to a young person just out their teens or recently graduated from college.

"Some parents hide trusts from their kids because they are afraid the money will ruin them," says Dick Wagner, JD, CFP, principal, WorthLiving, LLC.

But teaching children to manage money doesn't happen on the day a trust fund passes to the child. It starts when the child begins to realize that money is a medium of exchange. In other words, preparation for inheritance starts early.

Financial Education Starts at Home

According to experts on the psychology of inheriting wealth, positive attitudes and values about money start at home.

"You communicate values about money through your example," says Nancy Langdon Jones, CFP, NL Jones, Inc. "Most children mimic their parents attitudes about money. Parents who have a healthy, affirmative relationship to money and who openly communicate about finances give their children a solid foundation for handling money and developing a comfortable relationship with wealth."

When should you start teaching children about money? How do you help them learn the right lessons? Nowadays, teaching kids about money is a lot more than just giving them an allowance and setting up a savings account for holiday and birthday gifts.

A recent survey of affluent parents sponsored by US Trust, (Source: ustrust.com/children.htm) revealed that a majority of these successful respondants take proactive steps to teach their children financial responsibility. Most give their children allowances and have set up saving, checking, and brokerage accounts for them. In addition, most parents expect their children to learn the value of earning money by requiring them to have part-time jobs during their junior and senior high school years and to contribute to the cost of college education by working part-time.

Tips for Pre-Schoolers

• The parents in the survey started training their children about money at a very early age. Here are some of the techniques they used:
• Dump out your change on the floor and show them how to distinguish among various coins. Explain the relative values of each coin by showing them how much it takes to pay for their favorite toy or snack.
• Play "store" and let your child "buy" things with the coins.
• Take your child to your office and show them where and how you earn your money.
• When children start asking for treats at the store, give them a dollar or two to spend and help them understand that if they spend $1 on the toy car, they can't also buy the toy airplane.
• Begin explaining how the products you buy are created by companies that you can own through shares.
• Give children some shares of the company that makes their favorite toy or food.
• Give children an allowance starting around age 4 or 5 so they can learn how to handle discrete amounts of money. An allowance helps the child learn how to manage money and share in the family's resources. A survey by zillions.org, formerly a magazine and now a website on financial education for children, showed that children who get a regular allowance tend to save more than children who don't. Increase allowances based on the child's age.
• Help children set goals and budget their allowance for both short-term and long-term expenditures.
• Help them distinguish between needs and wants.
• Require children to save a portion of their allowance and to donate a portion to non-profits or charitable organizations.

Tips for Pre-Teens

• Let older children participate in discussions on family finances, explain how the family budget works, and show them how large sums of money are managed. When the family makes a large purchase, such as a new car or vacation home, let children participate in the decision-making process.
• Don't advance an allowance when a child "blows" his/her money too early in the month. Children need to learn how to anticipate needs and to experience the consequences of impulse spending.
• Teach children how to make good buying decisions based on their own sense of values not peer pressure.
• Teach children a work ethic and let them earn additional money by performing special chores over and above their assigned family responsibilities. "Let kids earn money," says Jones. "They need to experience and appreciate the value of earning."
• Plan low-cost and no-cost family activities to show children how to have fun without spending money.
• If children want to "borrow" money for a major purchase, such as a new bicycle, assess a reasonable amount of interest and require that the loan be repaid within a reasonable amount of time. In this way, the child learns that credit costs money and carries responsibility for repayment.
• "Create a family investment committee and fund it with seed money," Wagner adds. "Let the kids participate in investment decisions and share profits with them. After a while, add a charitable component and let the kids decide where to allocate the money. This teaches both respect for money and responsibility for using it properly."

Tips for Teens

• Establish a clothing allowance for teens and let them manage their clothing money without interference.
• Explain how credit works and why it costs more to charge items.
• Teach children how to read financial information and give them subscriptions to financial newspapers and magazines.
• Encourage children to invest a portion of their money in the stock or mutual funds. The Mutual Fund Education Alliance lists at least 40 funds aimed at kids. "Let kids set up their own accounts and make their own decisions about what to invest in," says Wagner. "Don't bail them out if they make mistakes and lose money. That's part of the learning process."
• Make sure teens understand what's coming from trusts and encourage them to plan how they will use and invest this money.
• Use the resources of the Internet. Many youth-oriented mutual funds and financial websites exist to help children learn how to make savvy investment decisions. Here are some websites to check out: www.strongkids.com; www.youngbiz.com; www.ssa.gov/kids/faqs1.htm.