Even though we have been hearing about this approach for some time - that of “ giving it all away ” rather than “ spoiling the children ” it still looks like more of a statement of values than a workable plan. In this approach, where does the money go instead? The answer usually is “ to charity. ” But how and when? Most people’s children will be young adults in any event before the question of gifting substantial assets to them ever comes up, and most children will be past middle-age before they inherit from their parents. Even as young adults, their values will have already been established for better or worse, so how could minimizing gifts and inheritances really make a difference? Possibly the answer is that they will grow up knowing that the inheritance and gifts will not be there to “save” them later.

But will they actually understand that message at an early enough age that it affects how they “grow up” ? It seems unlikely. What they see as they grow up is the wealth their parents enjoy, how they got it, how they use it, and who and what their parents value and love. Moreover, the concept seems unworkable in other ways. In order to replicate the entrepreneur’s experience in which motivation is perceived to come from the lack of financial security, it would seem that transferring even a tiny fraction of a large fortune to the children would ruin their motivation, if we believe the theory. Note that in the 1986 Fortune article Buffett spoke of transferring to his children only a few hundred thousand dollars. That could force the children to absorb a severe change in their level of financial security, and the change may even discourage them from taking on risks and challenges. It could be that what the advocates of this approach are really doing, in view of the vast size of their fortunes, is deciding to give it to charity in order to deploy it for better uses.

Since the wealth clearly exceeds the family’s financial needs, and since the next generation may not have an active role in the businesses founded by the entrepreneur, the goal of passing the ownership to the children may be viewed by the entrepreneur as unproductive. It amounts to putting the ownership “on hold” because it would not be actively managed to advance an identified goal. Giving it to charity also avoids the need to construct a fair and effective system for the next generation to manage it as private wealth, including dealing with the estate tax costs. Our experience suggests that many people assume it is easier to design and operate a charitable giving program, as compared to a wealth management program for the next generation, especially when the asset value is very large.