Preparing the Next Generation

The best estate plan can be undone by an heir who has never managed money. Most young adults leave home without having budgeted, invested or used credit under supervision, and many children of comfortable families never hear their parents talk about money at all. This chapter covers what research says about teaching money, a stage-by-stage plan from early childhood to inheritance, the accounts that let children practice with real money, and how to prepare someone to receive wealth rather than just leave it to them.

What actually works in teaching money

Classroom financial education has a mixed record. A large 2014 review of studies in Management Science found that courses raised knowledge but had small effects on later behaviour, and the effects faded within months. Lessons delivered just before a decision, such as how a credit card works when someone gets their first card, did better.

The lesson for families is that practice beats lectures. Children learn from handling real money with real consequences while the stakes are small, from watching how their parents decide, and from being told the reasons. A growing number of states now require a personal finance course for high school graduation, which helps, but it does not replace practice at home.

Three principles run through the stages below:

• Real money, real choices. A child who chooses between two things and lives with the result learns more than one who is told the answer.
• Small mistakes early. Overspending an allowance at 10 is cheap tuition for avoiding a credit card balance at 25.
• Talk about the why. Explain why you save, give, insure and invest, not only that you do.

Stage by stage

Ages 3 to 7: money is finite and waiting pays. Use coins and clear jars for spending, saving and giving. Let a child save for something they want over weeks. Talk out loud at the shop about choosing between two things.

Ages 8 to 12: managing a budget. A regular allowance, paid on a schedule, with clear rules on what it must cover. Comparison shopping, the difference between needs and wants, and a first bank account. Some families pay a little "interest" on money left in savings to make compounding visible.

Ages 13 to 17: earning, cards and investing. A job or paid work brings a paycheck with tax withheld, which is worth reading together. A debit card or a teen account, with a parent watching, teaches tracking. This is the age to show how investing works with a small account and to explain credit before the first offer arrives.

Ages 18 to 25: running a life. A real budget, a credit card paid in full each month, joining an employer retirement plan and taking the full match, understanding health insurance and renters insurance, and a starter emergency fund. Parents can move from deciding to advising.

Before an inheritance. Gradual involvement: attending family meetings from the late teens or twenties, meeting the family's advisers, reading the investment policy, sitting on a family giving committee. Some trusts release money in stages, such as a share at 25, 30 and 35, so mistakes made with the first share are survivable.

Why starting young matters so much

The strongest argument for teaching investing early is the arithmetic of time.

Someone who invests $100 a month from 15, at 7.0% a year, puts in $60,000 by 65 and ends with about $503,295. Starting the same habit at 35 puts in $36,000 and ends with about $116,945. The early starter puts in more, but ends with several times as much, far more than the extra contributions explain, because the first twenty years of growth have the longest to compound. Showing a teenager this comparison, or letting them try their own numbers in the millionaire calculator, makes the point better than any lecture.

Accounts that let children practice

A custodial Roth IRA. A minor with earned income, such as wages from a job or documented self-employment, can contribute to a Roth IRA that a parent manages as custodian. The yearly limit is the lower of the child's earned income and the IRA limit, $7,500 in 2026. A parent or grandparent can give the child the money to contribute, as long as the child earned at least that much. Contributions can be withdrawn later without tax or penalty, so the money is not entirely locked away.

Custodial accounts (UTMA or UGMA). An account held by an adult for a child, which can hold cash or investments for any purpose that benefits the child. The gift is irrevocable, and the child takes full control at the age set by state law, commonly 18 or 21 and in a few states up to 25. Investment income above a small yearly amount may be taxed at the parents' rate under the "kiddie tax", and for financial aid these accounts count as the student's asset, which reduces aid more than a parent-owned account.

529 college savings plans. Growth is tax-free when used for qualified education costs, including some K-12 tuition and, since the 2025 tax law, a wider list of K-12 expenses. The parent or grandparent stays the owner, so the money does not pass to the child's control. Under SECURE 2.0, money left in a 529 that has been open at least 15 years can be rolled into the beneficiary's Roth IRA, subject to the yearly IRA limit and a lifetime cap. Chapter 3 explains how a lump sum can be front-loaded into a 529 under the gift tax rules.

A new children's account. The 2025 tax law also created a tax-deferred investment account for children under section 530A of the tax code, often called a Trump account, which can accept contributions from July 2026, with a one-time federal deposit for eligible children born from 2025 through 2028. The rules are new and still being written, so check current IRS guidance before choosing it over a 529 or a custodial Roth IRA.

Preparing someone to inherit

Money left to an unprepared heir carries risks that education alone cannot remove, so pair teaching with structure.

Tell them it is coming, in stages. Heirs who learn the size of an inheritance only at a funeral have no time to prepare. Many families start with the existence of a plan and the names of the trustees, and share amounts later as the heirs mature.

Use the trust to teach. A trustee with discretion, guided by a letter of wishes, can match distributions to earned income, pay for education or a first home, and hold back during a crisis. Staged distributions give practice with real money.

Protect the inheritance from divorce and creditors. In most states an inheritance is the heir's separate property only while it is kept separate; mixing it into a joint account or using it to pay down a jointly owned mortgage can make it marital property. Money that stays in a well-drafted trust with a spendthrift clause has more protection. Rules differ by state.

Give them a role in giving. A family donor-advised fund in which each child recommends a grant each year, and presents the reason to the family, teaches research, budgeting and values at the same time. Chapter 4 explains how donor-advised funds work.