I went to U of I in Champaign-Urbana. Both undergrad and law school. A lot has changed since I left law school in 1995. Many new buildings, and tuition has gone way up. Do you know how much it will cost now for 4 years of undergrad, including tuition, books, room and board, etc.? Somewhere around $100,000.
Suppose your kid is ready to head to college this fall. He gets all his stuff packed, buys that little fridge, picks out a shower caddy thing, and is ready to head off to college. The day comes where you pack up the mini-van and head to Champaign. You help carry all the stuff into the dorm, give him a hug, tell him to behave himself. Then you pull out your checkbook and say “Well, since we know it’s going to cost you about $100,000 to get through the next 4 years, I thought I would go ahead and give it to you now.” So you write out that check, hand it over, get in the car and drive back home.
Assuming you had $100,000 sitting around that was earmarked for your child’s college, would you do it this way? Would you hand the entire amount over on the first day he moves in to the dorm? No? You wouldn’t do that? Why on earth not?
Well, I guess there could be a few “complications”.
1. He might not spend it wisely. You know, parties or a new car or who knows what? Then runs out of money before he gets the degree.
2. He might be taken advantage of. If word got out that he had a big wad of money just handed to him, do you think he would have any new “friends” that might be interested in hanging out? I’m sure there would be plenty of kids willing to help him make some financial decisions.
3. He might be less motivated to work hard. Hey, you’re only young once. Doesn’t it make sense to have some fun with a little of that money now? He figures he can always get a job during his last year or two of college to make up the difference.
4. What if he gets in trouble? Maybe gets in a car wreck and gets sued? Or gets in with the wrong crowd and makes a bad decision that leads to property damage or criminal charges?
5. He isn’t emotionally ready to handle that kind of money. You just handed him $100,000, even though he’s never had more than $500 in discretionary money to himself before now.
6. What if his plans change? Maybe he flunks out, changes his major, takes a semester off, or drops out of school to start a band? Are you expecting to get change back on your $100,000 if he doesn’t finish with a degree?
7. He might fall in love. Yes, love can do strange things to someone’s financial decisions.
Well, I guess you realize that people die all the time leaving assets to their kids. And those kids may not be any more ready to receive it than your college student was to receive that $100,000 right now.
Let’s say something happens to you tomorrow and you left all your assets (house, retirement plans, life insurance, bank accounts, etc.) to your kids. Would the amount of money you leave them make an impact on their daily lives? How much impact? Very little, some, or a whole bunch? Would the lifestyle they could afford be changed?
Think of the specific amount of money you would leave if you died tomorrow. How much will it increase your child’s net worth? Double it, triple it, make it go up 10 times or a 100 times? or more?
All those issues that cause concern about the college student are the same issues we address with clients in estate planning. These issues are what I call “wealth reception” issues. It’s not just about how quickly we can get the check to the kids. More important is what impact, good or bad, will the money have on the kids after they get it. And will the wealth better their lives one year, 5 years, or 10 years after you’re gone?