Most affluent Americans have accumulated wealth by working hard, saving money, living beneath their means, investing, and surrounding themselves with good counselors. Many first-generation wealth-creators find it difficult to pass these values on to their children and grandchildren. Too often these loved ones don’t understand how hard it was to accumulate the wealth to which they’ve grown accustomed.

This leaves parents and grandparents worried that their loved ones will never achieve true financial independence. They know this is not healthy for their loved ones. But parents and grandparents often feel stuck and don’t know how to ease the transition from dependence to independence.

Here are seven steps to consider if you are struggling with this issue.

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"I'm really passionate about building an integrated plan for my clients. Taxes, retirement, investments, estate planning and so much more. I care about getting the details right."


Step 1 – Recognize that you have an issue

Many affluent parents and grandparents don’t realize how much money they are actually giving their loved ones every year. In completing these exercises with my clients, once we factor in all the different sources of support, I have discovered that this can total multiple tens of thousands every year and even as much as one hundred thousand. Once you recognize the issue, you can address it. Often times this recognition occurs once we document the spending.


Step 2 – Decide on your independence goal

Some families don’t want their children and grandchildren to be entirely financially independent. Others do. But until you set a goal, you won’t be able to create a plan to achieve that goal. I advise my clients to be specific about the independence goal. Some families choose to set an independence goal based on a specific dollar amount while others choose to set the goal based on a percentage of cost-of-living.

For those who choose a goal of independence based on a specific dollar amount, this amount is often tied to the yield of a trust fund or other investments. For instance, if a trust fund yields $50,000 in after-tax capital gains, this amount could be the measure for true independence. A child or grandchild who can live on the capital gains of investments is deemed to be independent.

Other families choose the percentage of cost-of-living option. In this approach, parents or grandparents estimate a reasonable cost-of-living for their loved one and set a target percentage to which they will contribute. For instance, if a reasonable cost of living is $50,000 and the parents or grandparents set a goal of 10%, their financial commitment would be $5,000 annually.


Step 3 – Document the spending

It can be a real eye-opener for parents and grandparents when they see how much money they are actually giving their loved ones every year. This is especially true for children or grandchildren who are in college or recent college graduates.

Key sources to examine include fixed expenses like housing, automobiles, insurance, health insurance and tuition. But you should also document discretionary spending on food, entertainment and relaxation. Don’t forget about credit cards and spending on items that have not been built into your budget. Total it all up and you might be very surprised at the numbers.

To accomplish this goal, you will likely have to create buy-in with your loved one toward the independence goal. Documenting spending requires maturity and discipline. Young adults are often not in the habit of documenting discretionary spending or keeping and cataloging receipts.


Step 4 – Define a reasonable budget and living expenses

This is where many parents and grandparents struggle. What was reasonable for them, when they were the age of their children and grandchildren, is no longer reasonable for living expenses. They know this. They are also torn because they want their loved ones to live a comfortable life – this is one reason they’ve worked so hard for their wealth.

This struggle is why it is beneficial to have the guidance and support of a financial advisor who can help create these realistic parameters and has done so for other families. Parents and grandparents who build these projections based on limited information may find themselves at odds with their loved ones. But if an objective and informed third-party can bring accurate numbers to the table, tensions often ease.


Step 5 – Create a covenant with your loved ones

These matters are always best handled through in-person conversations. I recommend that you present your concerns, your reasons for making this change and your desire for a covenant to your children or grandchildren first. Then present the budget parameters and be prepared to negotiate.

You might be surprised at what they’re willing to give up in exchange for something else. The most important thing is that the budget is realistic and helps the children or grandchildren move toward your desired level of independence. At the end of this meeting, everyone should be in agreement and should covenant to live by the budget parameters.


Step 6 – Enforce the covenant through a lending ledger

Some loved ones may follow the budget with ease. Others may struggle to live within their means. I recommend that you create a lending ledger where you document overages and add them to a ledger with the expectation that a child or grandchild will pay back the amount in time.

You can create the terms of the loan based on the income of the child or grandchild. This is also where children and grandchildren begin to learn that a credit card is not an emergency rainy-day fund.


Step 7 – Define your slow-down path

I recommend that you create a path that weans your children or grandchildren down to your desired level of independence. This path is best received when it is gradual and realistic, based on the loved one’s ability to generate their own income.

For instance, if you’ve set a goal of complete financial independence for a college-age child and you’ve been supporting them for $30,000 a year, you might consider gradually reducing this amount by $10,000 a year over a three-year period. This would allow them to work into their careers and learn to live on the income they are generating.


Will this approach work?

In a word – yes. These seven steps have been very successful in helping my clients create true financial independence for their children and grandchildren. But it’s not always easy and it will take time.

As parents and grandparents, our hearts are always torn between helping our loved ones by taking care of them and helping them by introducing good discipline. It can be very challenging to walk this tightrope.

Trying to take these steps alone can be very difficult. This is where an objective third party, a good financial advisor who wants to help the entire family – not just manage your investments, can be an invaluable resource. A good financial advisor can also help your children and grandchildren learn the basics of budgeting, saving and investing. These are likely the very disciplines that helped you accumulate wealth.


Whitnell is not a law firm and does not give legal advice. The information contained herein should not be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents of this article are intended for general information purposes only, and you are urged to consult a lawyer concerning your own situation and any specific legal questions you may have.