History abounds with stories of families who amassed great wealth – and then lost it all, often when the children or grandchildren embarked on legendary spending sprees, apparently unaware that their money was a finite resource. Conversations between generations about how to preserve the family’s financial legacy are crucial, yet many wealthy parents delay or even try to avoid these critical talks – with potentially dire consequences for the family fortune.
For a medium of exchange grounded in numbers, money comes with many emotional quandaries. While many high net worth parents are concerned about preserving their fortune once they’ve shuffled off this mortal coil, they may also worry that discussing their money with the next generation may dull their children’s motivation and result in a sense of entitlement.
Neo Kgantsi, a portfolio manager at Sanlam Private Wealth, works with wealthy individuals who face such issues. ‘We invest money on behalf of private individuals and deal with investment vehicles like family trusts, which are set up to look after intergenerational wealth planning and pass on the family legacy,’ he says.
‘Commonly we see a lack of communication between parents and their heirs. They might hide the money – or the extent of their wealth – from their children, because they worry that if their children are aware of how much they stand to inherit, it might discourage them from working hard today and breed a culture of dependency and slothfulness.’
TRANSPARENCY IS VITAL
A 2012 study by US Trust found ‘more than half of high net worth boomer parents had not fully disclosed their wealth to their offspring, while another 13% kept completely mum’. No similar study has been completed in South Africa, but it’s not likely to be all that different here.
This lack of transparency has a huge downside, says Neo. ‘The problem is that once the parents pass on, those kids wake up and find they are multimillionaires overnight. They think they can spend the money as they wish – squander it – and the funds won’t run out. But they do.
‘It’s far better to prepare them to manage money efficiently. We encourage clients to educate their family about how to pass on their wealth and to teach their children about the value of money.’
To help clients navigate these choppy waters, Sanlam Private Wealth recently took two families through a fascinating exercise. In both families, the parents were concerned about their offspring’s spending habits and lack of financial know-how. Armed with some knowledge about what their children were likely to do – and buy – in the event of their parents’ demise, Sanlam Private Wealth ‘locked’ the children up in a bank vault with their full inheritance displayed before them in piles of crisp R200 notes.
Following voice prompts, the children allocated the necessary amounts to taxes and estate duties and then divvied up the family fortune among themselves. The kids watched wide-eyed as their riches dwindled to nothing within minutes.
‘The thing that strikes me about these families is that there were no boundaries related to money,’ says psychologist Angela Hough-Maxwell. ‘Of course, all parents just want to provide the best for their children, but in these examples we see the kids saying, ‘If I want something, I get it.’ And while parents are trying to be generous to their children, at the same time the children are not learning any healthy financial boundaries.’
Parents also need to have honest conversations with their children. ‘Include things like your values and where the money came from,’ says Angela. ‘Children need to develop an understanding about how money works, and that it’s a medium for things of lasting value like health and education. Talk to them about what you want for them and the future you envisage for them. Take them to work with you so they can see what it takes to produce that money.’
Some parents ensure their children are informed about money and pass on their own good financial habits, says Neo. ‘Others perhaps grew up in a single-parent family where they were denied many things. Understandably, once they start making money, they want to give their kids everything they missed out on. So the lines get blurred.
‘And once you’ve pegged a certain lifestyle for your kids, it’s hard for them to downgrade. They grow up thinking that money means they must have the fastest car, the biggest house, the best sneakers, and so on.’
Angela’s advice is to start when the kids are young, if possible. ‘They can start with a piggy bank when they’re small, and graduate to a bank account when they’re a bit older. But put limits on the amount of money they get. And when it’s finished, it’s finished – there’s no endless supply.’
Neo says the key to securing your wealth for the next generation is to educate yourself as a parent on how to manage money, especially in the current economic climate. Learn how to preserve and grow your wealth, and pass those lessons on to your children.
‘Fortunately, you don’t have to master all the details of wealth management,’ Neo says. ‘There’s plenty of advice and guidance available in the form of financial advisers and investment professionals who can lend a helping hand.’
Click here to meet the two families, watch their bank vault experience and use an online tool to track your own inheritance or that of your heirs.
This article has been adapted from a piece by journalist Mandy Collins that appeared on BusinessLIVE recently. Read a related articlehere.
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