How Much Inheritance Is Too Much?

Some wealthy parents are concerned that after a certain point, money passed down will be damaging to the next generation.

Cancan Chu / Getty

When Lynn Chen-Zhang’s older son was in third grade, he came home from school one day wondering why he bothered studying so hard: A classmate had told him that because he had wealthy parents, he’d be all taken care of in life. What was the use?

This question worried Chen-Zhang and her husband—who run a financial-advisory firm in Portage, Michigan—and prompted them to have a talk with their two boys about their financial future. They planned to pay for as much schooling as their kids wanted, but beyond that, Chen-Zhang told me, their message was, “You're on your own. And don’t expect any inheritance from us.”

Chen-Zhang’s sons ultimately studied plenty hard—now in their early 20s, they are both establishing careers in finance—so if she and her husband were to give them any help with money, she guesses it’d come in the form of a gift to any future grandkids, such as a contribution to a college-savings plan. “I think it is not in the next generation’s best interest to leave them a large sum of money,” she said. “From a selfish standpoint, I want my kids to be successful. I want them to be contributing members [of] society.”

Chen-Zhang and her husband’s approach may be a reversal of the typical way of thinking about inheritances, but it is one that is also preoccupied with heirs’ well-being. Some affluent parents are focused not on whether their kids will have enough, but on ensuring that they won’t have too much.

The worry that money might be damaging to those who inherit it is not necessarily a groundless rich-person neurosis. Though it may not be a particularly sympathetic problem, coming into enormous wealth can be isolating and overwhelming, especially in early adulthood, a life stage when people forge important parts of their identity. Parents’ and grandparents’ central concern, according to the wealth managers I spoke with, is that receiving too much money will neutralize heirs’ desire to work. There don’t seem to be any studies that systematically examine this effect, but researchers I consulted said that in their experience, the mere presence of a large inheritance was not an automatic destroyer of motivation. Nonetheless, it’s a fear for some wealthy parents and grandparents.

Fears of a too-big inheritance are, overall, likely quite rare, given that most inheritances in the U.S. are not extravagant. Data from the Federal Reserve shows that about 85 percent of inheritances are smaller than $250,000, and the majority of those are $50,000 or less. But a small segment of the country passes down a disproportionately large amount of money. While only about 2 percent of inheritances from 1995 to 2016 were larger than $1 million, that 2 percent accounted for roughly 40 percent of the money inherited during that period of time. Some of the wealth-management experts I spoke with said that they wouldn’t expect many families with a net worth below $10 million to think like Chen-Zhang. But in the U.S., a not-insignificant number of families are above that threshold: A wealth-management consultancy called the Spectrem Group recently estimated that about 1.4 million American households have $5 million to $25 million to their name, and another 173,000 hold wealth in excess of $25 million.

So how much of an inheritance is too much? There aren’t agreed-upon criteria for determining any particular cutoff. Experts on wealth and inheritances whom I interviewed for this article referred to a quote often attributed to Warren Buffett: “A very rich person should leave his kids enough to do anything but not enough to do nothing.” That’s helpful in the abstract (and quite catchy), but doesn’t provide much guidance in the way of hard numbers.

Scott Nash, though, has gotten down to specifics. Nash, the founder of the East Coast grocery chain Mom’s Organic Market, has made more money than he’d care to divvy up among his three kids. “I don't let them know that anything's coming their way—I think that could be dangerous to their motivation,” he told me. “I think that people generally ought to be in survival mode, mentally, until their mid-30s.”

Nash figures he and his wife won’t leave their kids more than $2 million or $3 million each (in today’s dollars), on the assumption that when he and his wife are no longer around, their children will be in or approaching middle age and will have worked without the expectation of inheriting loads of money. At that point, he thinks an inheritance would help them “avoid painful situations” and cover “the basics” of what he considers to be a good lifestyle. What qualifies as “good” is of course subjective, but Nash would like his children to be able to “send their kids to good colleges,” “live where they want to live,” and “take some vacations.” He’ll leave them money, but “never so much that they don’t have to work.” Most of the rest of his wealth, he expects, will go to philanthropic causes.

Nash believes he’s in the minority among his social group in thinking cautiously about what he gives to his kids. “I’ve got friends who have given their [college-age] kids, like, 5 million bucks each already,” he said. “It’s not an inheritance, but ‘Here’s a bunch of money.’” (Given his perspective, it may be unsurprising that Nash belongs to the Patriotic Millionaires, an advocacy group made up of wealthy people troubled by “the destabilizing concentration of wealth and power in America.”)

“Baby Boomers are aging, and [some of them are] starting to accumulate fairly significant wealth,” says Steve Cassaday, who runs the wealth-management firm Cassaday & Company in northern Virginia. “They’re really being thoughtful about this question” of what to do with their money. When clients are concerned about leaving too big of an inheritance, Cassaday says, an alternative they seem to like is decreasing the amount and putting “the difference into one fund for charity, and the kids make the decisions about the disbursements.”

Perspectives on what constitutes “too much” seem to vary depending in part on whether parents inherited their wealth or earned the majority of it themselves. When significant wealth gets passed down through multiple generations, inheritors can get the sense that “they’re just the caretakers of it,” said David Lenok, a senior editor at the trade publication Wealth Management—which means they might be more inclined to keep up the family tradition and will it to their own children.

Lenok told me that self-made rich people can have a different relationship to their fortune, because they have firsthand knowledge of what was required to amass it. As such, they might be more interested in bequeathing not just money to their children, but a good work ethic as well. For that reason, “I think they would be more likely to draw the line” when it comes to capping an inheritance, Lenok said.

No wealth-management expert I talked for this article would name a specific amount as the ideal, balanced inheritance. “In the industry, we chuckle a little bit, because families want some sort of magic number … and the reality, of course, is that it's a lot more nuanced,” said Stacy Allred, who runs Merrill Private Wealth Management’s Center for Family Wealth.

Matthew Wesley, a colleague of Allred’s at Merrill, told me that he heard this question a lot when he was working as an estate-planning attorney in Silicon Valley, advising families with tens or hundreds of millions of dollars. “About four or five years ago, I finally came to an answer that seems to work well,” he said. “The answer is: as much as you prepared them for. It really puts the emphasis on what should be the emphasis, which is not the amount of money, but rather the readiness of the children to receive that money.”

One such element of preparedness is familiarity with the world of money and business. “I think there's a common notion out there that wealthy kids inherit cash and stocks and bonds, but they don't—they inherit structures, [like] trusts and foundations and LLCs,” Wesley said. “You have to know how the foundations and the structures and the LLCs work.”

And preparation can start early. Dustin Gale, a senior wealth adviser at the Los Angeles–based investment firm Kayne Anderson Rudnick, suggests that clients try to teach their kids about “the value of a dollar” at an early age. When kids are as young as 7, Gale says, parents can educate them about the basics of investing, perhaps by having “your child sit on your lap and when you’re looking at a portfolio, talk about a specific company.”

The standard alternative to giving money to one’s family members is to donate it, and affluent families do a good deal of that; some high-profile, ultra-wealthy people such as Buffett, Bill Gates, and Mark Zuckerberg have publicly pledged vast chunks of their wealth to charitable causes. But the half a dozen wealth managers I spoke with said that when wealthy parents figure out how much money to leave to their kids, they tend to be guided by what they perceive to be best for their kids, as opposed to what they perceive to be best for society.

Rachel Sherman, a sociologist at the New School and the author of Uneasy Street: The Anxieties of Affluence, is not surprised that broader societal concerns, particularly rising economic inequality,  aren’t altering many people’s  philosophies on the inheritance component of the estate-planning equation. “Since no one can predict the future, it makes sense to keep or pass on as much as you can, because you never know what might happen,” she wrote to me in an email. “In a society like ours, in which health care or elder care can bankrupt even rich people, there is all the more reason to hang onto/pass down everything they have.”

Sherman also suggested that there is a rigidity to how people think about what will happen to their money after they die: “I think conventional ideas about money and accumulation, which are reiterated by financial professionals, make it hard for people to imagine doing something else with their money other than accumulating as much as they can and passing it down.”

The decision-making processes around estate planning have, however, changed in another way: They’re more open than they used to be. Wesley, of the Merrill Center for Family Wealth, sketched out a generational evolution. “If you look at the Greatest Generation, it was pretty much estate planning behind closed doors—preserve as much as you can, create trusts, and have those trusts operated professionally for as long as possible,” he said.

The wealthy members of the following cohort, the Silent Generation, also favored trusts, but sometimes made disbursements conditional on their inheritors’ good behavior—say, keeping up a certain GPA, staying away from drugs, or even getting married. Some clauses of these “incentive trusts” were intended to thwart the motivation-killing effects that wealthy people fear their children and grandchildren might experience, but the overall arrangement, Wesley said, is “most often seen by beneficiaries as [an attempt] to control them from beyond the grave.”

Resentment is not a legacy many elders want to leave, but incentive trusts also create more practical problems. One feature that some benefactors have included is an “income match,” meaning inheritors only get to withdraw from the trust as much as they themselves earn. But this can backfire: “The classic example is somebody wants to join the Peace Corps or Doctors Without Borders and is not going to earn a lot … but really has good goals,” said Diane Lederman, a managing director at the investment firm Neuberger Berman. She told me she would often raise concerns like this to clients considering incentive trusts.

Wesley said that incentive trusts have declined in popularity lately, and their somewhat dictatorial stance toward inheritances is being replaced by a more open, communicative one. With previous generations, “the first time anybody knew how much money was there was at the disclosure of the estate plan after the last of the parents died,” he said. “Now we’re seeing disclosure happening much earlier, and people are [trying] to do that in a methodical and thoughtful way.” Whatever today’s parents and grandparents decide to leave to the next generations, hopefully the heirs will know what’s coming—and be ready for it.