232 – The Dangers of Large Inheritances

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The Dangers of Large Inheritances

Learn about setting up an inheritance system that could stay in your family for 100+ years.

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If you are trying to figure out how to distribute your inheritance after your passing, then this is the episode for you! Bob and Shawn touch on key points on how a large inheritance can lead to a spending frenzy, a lack of understanding of how long it takes to build wealth, and more dangers when it is not distributed properly.

Instead, a large inheritance has various steps and safeguards that can be put in place in order to have a better success rate so that it might last for several generations. The goal should be to pass on not just the wealth, but the wisdom and good money management habits that allowed the wealth to be built in the first place.

Mentioned In This Episode

Bob (00:00):
Give out a portion of it, but not all of it so that it goes right back into it and it grows. And this is the power of setting up an inheritance the right way.

Shawn (00:21):
Welcome back to Christian Financial Perspectives. My name is Shawn Peters. This is Bob Barber, and today we’re going to be covering “The dangers of a large inheritance”, which when you say it out loud, it kind of almost seems weird. What do you mean? How is a large inheritance dangerous?

Bob (00:34):
That’s right. Yeah. But scripture does talk about it for sure.

Shawn (00:39):
Yes. Proverbs 20:21, “An inheritance claim too soon will not be blessed in the end.”

Bob (00:47):
There’s an old saying, “shirt sleeves to shirt sleeves in three generations.” What does that mean? Well, generation one makes wealth. They create wealth.

Shawn (01:02):
Generation one creates wealth.

Bob (01:04):
Okay. Generation two, they don’t use it all, but they use a lot of it. But the time the wealth gets from generation one to two into the third generation, the third generation squanderers it all. And that’s what we mean by shirt sleeves to shirt sleeves in three generations. And this has been going on for hundreds of years. And it even happened in my own family because my great grandfather created a lot of wealth, owned thousands of acres, a big rancher, and then it went to my grandfather. And then my dad was not very good with finances. I mean, I loved my dad. He was a great godly man, but he was terrible with finances and spent it all, and then it starts over with me again.

Shawn (01:56):
So you’ve seen this play out in many families and even in your own…

Bob (02:00):
in my own family. Right.

Shawn (02:02):
Exactly. Your parents and grandparents.

Bob (02:03):
You haven’t seen it play out, but your dad has done an incredibly good job.

Shawn (02:10):
I would definitely say my dad would have to be in generation one in this type.

Bob (02:14):
Yes. So he’s created and you’re the second generation, and then your children, you need to be very careful. Your dad needs to be very careful, just like I do, about how we pass off and give the inheritance to the following generations. And that’s what we’re going to be talking about today.

Shawn (02:34):
Okay. So what you’re saying though is that this scenario doesn’t have to play out.

Bob (02:40):
It doesn’t have to. And if you study successful families over the generations, you’ll find them. One right here in Texas is the King family. The King Ranch. It’s one of the largest ranches, the largest ranch.

Shawn (02:53):
Most people have probably heard of that, especially if anyone watching or listening, King Ranch edition with Ford.

Bob (02:59):
Yeah, the King Ranch edition Ford truck. Yeah.

Shawn (03:01):
And now they’ve got the King Ranch edition for just about all the models. You get the Explorer, you get the Expedition, the truck, everything.

Bob (03:08):
And you think about the Rockefellers too, and families like that pass generations down for wealth for multiple generations and it stayed is they understand the concept of what I call the golden goose. The goose is laying the golden eggs. The problem with inheritances is that when you just divide it up…

Shawn (03:32):
So once the second spouse passes away, you divide it up amongst all the heirs instead.

Bob (03:38):
And what you’ve done is you taken the goose and just chopped it up. Yeah. And when you think about compounding, we have talked about the rule of 72 and compounding. It takes just as long for $10,000 to go to $20,000 as it does for 2 million to go to 4 million or 4 million to 8 million. So what happens is, is when you start chopping the wealth up and you just start distributing it out…

Shawn (04:04):
You have smaller and smaller principal amounts that can actually earn.

Bob (04:08):
That’s exactly right. So what happens is that wealth creates more wealth, and especially if all you’re bringing off of the wealth is the interest, don’t take the principal off, let the principal stay there and even of the interest that you earn, give out a portion of it but not all of it so that it goes right back into it and grows. And this is the power of setting up an inheritance the right way. I came up with basically what I feel are around 10 to 11 dangers of a large inheritance.

Shawn (04:47):
So some things to look out for.

Bob (04:49):
Right.

Shawn (04:50):
Or avoid. Okay. Well, number one, it can cause a spending frenzy. Many inheritances are spent within just two to three years of receiving.

Bob (05:01):
We’ve seen this right ourselves, haven’t we? Right here in our firm.

Shawn (05:06):
We can’t name any specific family names, but we have seen where there’s a large inheritance come through or some sort of mineral rights or something like that that’s found. And then we see some of the family ends up buying extra houses and boats and cars and everything else you can think of. And then eventually, the money starts to dwindle.

Bob (05:27):
Because they didn’t realize the cost behind all that.

Shawn (05:30):
Exactly.

Bob (05:30):
And maintaining that.

Shawn (05:31):
But not only that, but you’re pulling so much out that well now you spent not just the interest, but you spent a significant portion of the principle. So now each year it’s earning even less. And so then people within two to three years, they basically don’t have anything left other than a whole bunch of stuff they bought that’s expensive to maintain. And then you have others that don’t change their lifestyle too much and two to three years later, they have more now than did when they started.

Bob (05:58):
We’re going to be careful about giving a full explanation of them. I just want you to hear them and really take them in. Otherwise, this will ended up being an hour long program. So the second one is a large inheritance can cause speculative behaviors. It can be investing in day trading in the markets, or it could be a risky business venture. I’ve seen this a lot too. We’re going to go start this business now with this inheritance.

Shawn (06:24):
Like go a restaurant. Those are always successful.

Bob (06:27):
What is they say about 90% of ’em fail after two or three years?

Shawn (06:30):
Something like that. I don’t know.

Bob (06:31):
It’s a really high percentage.

Shawn (06:32):
Yeah.

Bob (06:33):
I’m always scared. I would be scared. So scared to start a restaurant. It’s so much work involved, too. Oh my goodness.

Shawn (06:38):
Another one, heirs with large inheritances can become a target of fraud and abuse by others. It’s very similar to when people win the lotto and then people find out that they won the lottery, and then it’s all of a sudden there’s cousins and long loss friends and uncles and aunts, all kinds of people that you’ve never heard of that all have a sob story or all have this great business deal. And I mean other times, even just actual crime, like people just trying to steal it.

Bob (07:05):
Yeah, that’s right. It can also distort the psychological power of ownership because receiving that large inheritance can cause a sense of accomplishment that can be lost in that transfer. I didn’t earn this. I didn’t make this.

Shawn (07:19):
But then what happens is, is that that money, that wealth, gives someone this false sense of that accomplishment or ownership and it’s like, “Oh, I know what I’m doing. I am not going to make mistakes.” Well, just because you have money doesn’t mean that you know how to make really good decisions.

Bob (07:38):
I’ve seen this play out where all of a sudden I’m smarter than everybody. Before I got the wealth, I wasn’t. But now I am, and no one can tell me what to do. I’ve learned it all.

Shawn (07:48):
The amount of money you have does not determine how good you are with money, especially if you received it and it wasn’t something you earned.

Bob (07:57):
Another point is the larger inheritance may not be taken seriously, not earned slowly over years and years. And prudence saving, we kind of said that, and it can compound many irresponsible behaviors like drug abuse. I mean, you think about how a large inheritance can buy many more drugs if somebody’s abusing drugs. Or, just if they have overspending habits, it’s going to make the overspending that much worse. So, that’s why it needs to be done in a wise way.

Shawn (08:29):
It can take away the incentive to work.

Bob (08:30):
That’s a big one, isn’t it?

Shawn (08:31):
If you have a lot of money, I’m like, well, why do I even need to work? I’ll just take it easy.

Bob (08:35):
Work appears in the Bible over 550 times where retire appears one time and it’s not in the context of the American retirement.

Shawn (08:45):
Yep. We’ve done an episode on that. Yeah, we have another one. It can create a sense of entitlement.

Bob (08:50):
It can make someone very boastful and pretentious.

Shawn (08:55):
An heir may not understand how long it takes to make the wealth they received, or that an inheritance can disappear in just a few years no matter how large.

Bob (09:03):
I think that’s a big one.

Shawn (09:04):
That’s something I have seen from the first time I worked with you for about five years, and then since I’ve come back, I’ve seen that multiple times myself that it doesn’t matter if it was $50,000 – $100,000 or a million and a half, the amount of time it takes for someone to spend through it if they don’t know how to handle it, they haven’t been equipped really.

Bob (09:24):
They didn’t realize how long it took to get there. I mean, it took mom and dad maybe 30 years to get there to get to that million and a half, and then it compounds and grows to 3 million.

Shawn (09:33):
I mean, how many clients Bob have you had that they made between $50,000 and $60,000, maybe $70,000 a year, and yet they have between 1 million and 2 million when they retire? I mean, obviously it takes a while to build up to that on that kind of an income, but you can spend that real fast.

Bob (09:51):
And then one of the last points I want to make this very important is if your heirs are not already wealthy and have not saved for many years, they may not be ready for that large inheritance. I mean, I’m pretty sure they’re not.

Shawn (10:07):
Especially as just a, “Yeah, here’s a lump sum.”

Bob (10:09):
We’ve given these points, so as we come down to…

Shawn (10:12):
We’re going to end there on all the negative stuff, right?

Bob (10:15):
No.

Shawn (10:15):
So what’s the answer? What’s the answer for a large inheritance?

Bob (10:17):
Number one, I think is set up the inheritance in using a trust or limited partnership like a family limited partnership and distribute it wisely and slowly, just like you earned it, you made it.

Shawn (10:30):
So how does someone do that though? If they’ve passed away and it’s gone into this, it’s within the trust.

Bob (10:36):
Well, you have to do this before you pass away.

Shawn (10:36):
So it’s set up, the instructions that have to be carried out are in the trust and limited partnership, right?

Bob (10:42):
That’s right.

Shawn (10:42):
And then you have an administrator that make sure that those rules and criteria are followed.

Bob (10:47):
And we’ll speak about that later. Number one, this is so important to emphasize too, keep your wealth together. Don’t take the golden goose and cut it up.

Shawn (10:57):
Which is why you needed number one. Have some we sort of set…

Bob (11:00):
We spoke about that in the beginning of the program. I mean wealthy families are wealthy years later, because they never took the goose and cut it up and distributed the wealth. They kept it together and then they gave out the earnings from the wealth to the heirs.

Shawn (11:14):
Part of the earnings.

Bob (11:15):
Part of.

Shawn (11:16):
Not all of it.

Bob (11:17):
Not all of it.

Shawn (11:18):
Another one have financial family financial meetings with your heirs before your death.

Bob (11:25):
I have that great book that was put out by the National Christian Foundation called Family. It’s “Family. Money.” and I would emphasize that everybody use that book. If you want to, you can give us a call and we’ll make sure to get one of those books, or we can send it to you in A PDF as well. But it lays out how to have a family meeting. This is so important that your heirs know how the wealth was earned.

Shawn (11:49):
Exactly, yeah. And have the conversations about what’s important too.

Bob (11:53):
Yeah. Equip your heirs with sound, financial principles and planning.

Shawn (11:58):
Teaching good money habits.

Bob (12:01):
That takes a long time. They need to have an excellent understanding of the wealth, how it was made, the story behind it, and I think this is a big one. The next one is very big, is have what we call pre inheritance experiences. Use the scripture…the scripture behind this, and we’ve talked about this scripture many times here is Matthew 25:14-30 talks about the parable of the talents where he gave one, three, and five. Then he came back and said, what’d you do with it? I think another good scripture that goes with this is Luke 16:10, “Whoever can be trusted with very little can also be trusted with much.”

Shawn (12:42):
So the idea here, Bob, is you’re saying, so with your heirs, give them something now.

Bob (12:50):
Right?.

Shawn (12:51):
Obviously don’t tell them that this is the pre inheritance experience test you’re putting them through, but give them, I think, what is it, $10,000 a year or whatever the number is now?

Bob (13:00):
Well, that’s like up to 14k or 15k now.

Shawn (13:02):
So there’s a certain amount you can give without causing a tax situation for whoever you’re giving it to. But give them that money and see what they do with it.

Bob (13:11):
Go back in six months to a year.

Shawn (13:12):
Do they reinvest it? Do they handle it wisely? Do they go spend it on much stuff they don’t need? Because that’ll give you a really good idea of whether or not they’re actually ready, if they can handle it. And number 7.

Bob (13:25):
Number seven is a really good one. Give it out slowly. You made it. And even match savings like they would do in a 401k. Maybe match the savings for your heirs and everything needs thought.

Shawn (13:37):
I guess it depends on how much you have and your heirs have. But let’s say you’ve done a lot better than they have so far. Maybe you have a one to two or one to four where for every dollar that they’ve put away into a retirement specific account, whether it’s their own 401k or an IRA, something like that, that you basically match for from their inheritance, that when you pass away that that’s something they have access to.

Bob (14:03):
And all this can be put into a trust. And you know what? I’ve put it all in my personal trust. Shawn has seen it. We’ve gone over it. I have all of this laid out, and your children and your heirs have got to understand how money works. The first thing that they’ve got to inherit is wisdom. If they don’t have wisdom, they’re not going to be able to handle this well.

Shawn (14:26):
Think of it as like a toolbox, Bob.

Bob (14:27):
Yeah.

Shawn (14:28):
If you give your heirs this really nice toolbox with all the tools they could possibly want, but they don’t know how to use them, chances are they’re just going to break something.

Bob (14:45):
Shawn, why don’t you read that scripture ahead for us there in relation to this?

Shawn (14:48):
Yeah. Proverbs 17:16, “Of what use is money in the hand of a fool since he has no intention of acquiring wisdom?”

Bob (14:57):
Yeah. Boil down to these last thoughts. Ensure your children and grandchildren are taught how to use good money management habits, saving investing habits.

Shawn (15:06):
I mean, you worked for wealth, saved for it, took possible chances to get it, and sacrificed, so you respected the wealth. Shouldn’t your heirs learn to do the same?

Bob (15:17):
One of the things that we’re doing, too, with our trust is we’re going to assign a corporate trustee after Rachael and I pass, not a family member, because a corporate trustee has a fiduciary duty and legal obligation to carry out the rules of the trust. If a family member is a trustee, they could be guilted by another family member into bending the trust rules.

Shawn (15:36):
Persuaded. Yeah.

Bob (15:37):
Exactly. A trustee’s not going to do that.

Shawn (15:39):
Which is good.

Bob (15:40):
Just remember, wealth in the hands of a fool compounds foolishness, but wealth in the hands of the wise compounds wisdom. So if you want to learn more how to set up a large inheritance for success for the following generations…

Shawn (15:51):
You can call or text our office at 830-609-6986. Schedule a phone online or in person meeting with us. You can also contact us through the website www.christianfinancialadvisors.com. As always, thank you so much for joining us and God bless.

[DISCLOSURES]

* Investment advisory services offered through Christian Investment Advisors Inc dba Christian Financial Advisors, a registered investment advisor registered with the SEC. Registration as an investment advisor does not imply a certain level of skill or training. Comments from today’s show are for informational purposes only and not to be considered investment advice or recommendations to buy or sell any company that may have been mentioned or discussed. The opinions expressed are solely those of the hosts, Bob Barber and Shawn Peters, and their guests. Bob and Shawn do not provide tax advice and encourage you to seek guidance from a tax professional. While Christian Financial Advisors believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability.