Wealthy parents fret over 'inheritance talk' with kids

The wealthiest families in America may never know the struggle of having to make ends meet, but they do have plenty to ponder when it comes to leaving their kids an inheritance.

Many fret over whether the fortune they have earmarked for their heirs might demotivate them to succeed on their own, while others question how much they should reasonably bequeath and when to tell their kids about the financial windfall coming their way.

Indeed, the most recent CNBC Millionaire Survey of high-net-worth families with investable assets of $1 million or more found 44 percent have not told their children about their future inheritance, and 27 percent waited until their child was over age 30 to do so.

"They may not share information [about their estate], because they think it might negatively impact their child's work ethic or because of confidentiality—if they think their children might talk about it with their friends or other family members," said Connie Torabian, senior vice president and market trust director for U.S. Trust, who works exclusively with high-net-worth clients. "It depends on the child's age and maturity."

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The delay in developing dialogue with their children regarding money matters, however, may also be influenced by inexperience.

"For many, broaching the subject with their children is what keeps them up at night," said Torabian, noting family finances are private and highly personal.

"Every family is unique," she added. "They may need to get comfortable with the process of sharing that information."

To that end, U.S. Trust created a financial empowerment program to help wealthy clients define their goals, foster dialogue and prepare their heirs for the responsibility of receiving their inheritance.

The program, geared primarily for the 20- and 30-year-old offspring of wealthy clients, is designed to educate young adults on their role and responsibility in the wealth transfer process via trusts and family partnerships.

One of Torabian's wealthiest clients, who wished to limit the amount of assets being transferred to his kids, chose a graduated approach, providing for the slow release of information about their future inheritance over the course of many years, allowing his children to "have their own experience" with acquiring wealth.

Indeed, the CNBC Millionaire Survey, which was conducted by market research firm Spectrem Group, found 19 percent of high-net-worth respondents wish to leave enough for their kids to be comfortable and maintain their standard of living, but not all they have, while 17 percent indicated they will be "very cautious" in how much they leave, because they want their children to learn self-reliance.

The largest number (41 percent) of respondents, however, said they plan to leave their children as much as possible and feel confident their heirs will be responsible with the money. Another 59 percent believe there is no such thing as "too much" when it comes to leaving their kids an inheritance.

Above all else, wealthy families want to be sure their loved ones are provided for. But they don't necessarily want to leave what they have in their will.

Additionally, 68 percent of survey respondents plan to transfer some or all of their wealth to their children before they die, while 15 percent plan to die before the wealth transfer takes place.

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"Many of our clients want to enjoy their wealth with their children and grandchildren," said Leslie Thompson, managing principal of wealth management firm Spectrum Management Group. "We're seeing more strategic gifting each year, whether it be to help fund their education or just make sure their children and grandchildren are taken care of."

Those who do leave assets when they die may include strings attached, requiring, for example, that their beneficiaries finish their college degree before collecting a dime.

Others may release assets for the sole purpose of buying a home, or dole out their children's inheritance slowly to prevent them from squandering their wealth or becoming complacent.

Still others use incentive trusts, which are intended to keep beneficiaries motivated by imposing specific conditions for distributions of trust income or principle.

Such trusts, which protect assets from creditors and divorcing spouses, may include a clause that cuts off payments to beneficiaries who fail to graduate from college or find gainful employment or who engage in substance abuse. Likewise, they may reward for charitable work or adjust income distributions higher if their heir opts for a lower-paying but meaningful profession, such as teaching or social work.

Not surprisingly, younger parents, with children who are still dependents, are far more likely to put conditions on the money they bequeath.

The CNBC survey found 32 percent of parents who are 55 and under plan to specify what their children should or can use their inheritance for, while 15 percent of those ages 56 to 69, and 9 percent of parents ages 70 and older, will do so.

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Affluent parents who intend to leave assets to their kids must decide for themselves how much they wish to transfer and how best to distribute their wealth.

To ensure their children maintain a sense of purpose, they must also invite dialogue,Torabian said.

"Have a plan and understand the scope of what you're ready to talk about and when," she said, noting estate plans are a fluid tool. "It needs to be revisited, especially as children grow and family circumstances change."

—By Shelly Schwartz, special to CNBC.com