One of the questions we ask people when we are talking about heritage or legacy planning is, “How much money does it take to harm a child?”
The answer, invariably, is “not much” or something along those lines.
Economics blog Marginal Revolution pointed me to this working paper from Vanderbilt University, who did a study on bankruptcy rates of lottery winners. The study focuses on comparing those who won between $50,000 and $150,000 versus those who won smaller amounts. The primary finding of the study is that people who are awarded large amounts are just as likely to eventually have financial difficulty (bankruptcy, in the extreme) as those who win smaller amounts. All the larger amount does is delay the financial reckoning. This shows, as MR notes, that bankruptcy isn’t really about money at all.
Here are a couple of choice quotes from the paper:
[I]ndividuals may lack the knowledge to handle large amounts of cash wisely; surveys have consistently shown that U.S. adults have relatively low levels of financial literacy.
and
In addition, our results indicate that policymakers should be cautious in offering cash assistance to heavily indebted individuals with the hope of increasing their longer-term financial security.
and
Furthermore, bankruptcy petitions filed in the 5 years after winning reveal that the net assets and unsecured debt of large winners are no different from those of small winners. This implies that even though the median winner of a large cash prize could have paid off all of his unsecured debt or increased equity in new or existing assets, he did neither. (emphasis added)
The paper isn’t specifically about inheritances going to children. It is about giving large cash infusions to people who may or may not be (emotionally) ready to receive them. In the second quote above, try replacing the word “policymakers” with “parents”.
So, if your children or other heirs stand to gain an inheritance from you, how (emotionally) prepared are your children to receive that inheritance? Do you see it as your responsibility to help prepare your children?
If you answered “not much” and then “yes” to these two questions, you may be interested in learning more about heritage/legacy planning. If you have questions about this, my email address is chris.sargent (at) acu.edu and our toll-free number is 1-800-979-1906.
Disclaimer: All information on this blog is for educational purposes only. Employees of The ACU Foundation, and the writer of this blog specifically, are not attorneys and are not your adviser. Call us or come see us if you have any questions about this. See here for a more comprehensive (and more boring) version of this disclaimer.