How Rich Parents Can Stop Their Kids From Wasting the Family Fortune

Warren Buffett advises wealthy parents to “leave their children enough so that they can do everything, but not so much that they can do nothing.”

Helping parents find that happy medium is at the heart of Kathleen Grace’s work as CEO of the Fiduciary Family Office, which manages about $800 million in total assets for about 60 families.

“Most families come to me and ask, ‘How much should I give my kids? How much is too much to keep from ruining them?'” Grace told Business Insider.

She said most of her clients — who have an average of $25 million to $30 million in cash on hand — are self-made, which makes it particularly tricky because they want to “help and support their children, but not in a way that takes away their motivation or desire.”

Removing everything straight and keeping their children on their feet is no easy feat. “It’s terribly difficult when you’re flying private jets and taking unique, one-of-a-kind family trips to help your kids understand the value of a dollar,” Grace said.

She outlined five ways wealthy parents can raise hard-working, responsible children who won’t squander the family fortune.

1. Teach Them Early About Money

Grace said the “biggest mistake” wealthy parents make is not teaching their children good financial habits when they are young. They need to understand the difference between needing and wanting, learning to delay gratification and judging whether a purchase will actually make them happier, she added.

Parents should give their children an allowance, educate them about money and talk to them about saving, spending, investing and giving, tailoring their advice to their children’s personalities, Grace said. She suggested kid-friendly budgeting apps and books with infographics as learning tools.

These first steps are essential to transforming children into responsible managers of family wealth, she said.

2. Develop their financial skills

Practical exercises can reinforce money lessons and develop good financial habits, Grace said.

Running a lemonade stand for a day can not only teach a child the basics of business and turn a profit, but also encourage entrepreneurship and embed the idea that hard work is rewarded, she said.

Giving a piggy bank with three slots for saving, spending and donating is a “cute way to teach kids” how to allocate their money among the things that are important to them, she added.

3. Make the link between work and wealth

The fund’s manager, Ross Gerber, recently told Business Insider that he and his wife make sure their children understand that having nice things is the result of hard work.

Grace told Business Insider that this was a vital lesson for children to learn. She said that when her daughter was young, she spent her afternoons after school at her desk so she could “see the connection between what mom does all day and us being able to have a great vacation.”

4. Encourage giving and volunteering

Encouraging children to be charitable and help others can turn them into kind, compassionate and empathetic adults who want to put their money to good use, Grace said.

Grace said she took her daughter to volunteer at a charity for survivors of domestic violence, where they sorted donations for Christmas presents. Now 22, her daughter still has “great empathy” for people who are in a more difficult situation or who had a difficult childhood, Grace said.

Modeling thoughtful, generous behavior as parents is what “builds character in your children later,” Grace said.

5. Stop them from wasting

Grace said most of her clients want their children to be “comfortable” but not be able to access large sums of money on a whim. One strategy is to establish an irrevocable trust with a trustee who acts as a “guardian” for ensure the next generation spends wiselyshe said.

Parents can use a trust to determine how money is spent, allocating sums for specific purposes such as starting a business, buying a home, completing higher education or paying for a wedding, Grace said.

She likened these controls to “bumpers when you’re bowling” because they keep children’s spending on track.