Don’t blow it: how to ensure a successful inheritance

The history books are littered with tales of people who have come to a sticky end after inheriting vast fortunes from their parents. Clarissa Dickson Wright, Woolworth heiress Barbara Hutton and the 7th Marquess of Bristol, to name but three.

Various studies show that 70% of family wealth fails to last more than two generations, with 90% of it vanishing after the third.

With these examples, it’s hardly surprising that many extremely rich and financially astute people think long and hard before making their children the sole beneficiaries of their fortune.

Warren Buffett (current net worth: $117 billion) has said, “I want to give my kids enough so that they feel they could do anything, but not so much that they could do nothing.”

Warren’s friend Bill Gates is reportedly leaving his three children a mere $10 million dollars each. I’m sure most of us would take that — but when you consider the Gates fortune is over $130 billion, it’s a drop in the ocean.

It’s understandable. The last thing any of us want is our kids losing the sense of purpose and reason-to-get-up-in-the-morning that working for a living gives us.

You may not be in Gates/Buffett territory, but many homeowners who consider themselves only averagely wealthy are sitting on a sizeable financial asset in the shape of their unmortgaged property. Provided they don’t need the equity to finance their care in old age, some will be turning their children or grandchildren into property millionaires when they die.

If you’re in the fortunate position of knowing you will be handing on a decent chunk of wealth to the next generation, how can you help them avoid the fate of so many ‘poor little rich kids’?

The aim is to encourage them not only to enjoy the fruit of your labours but also use it responsibly, to benefit themselves and others, and conserve and grow it for their own heirs, too.

Five tips to keep wealth in the family

Strangely enough, successful inheritance has very little to do with how much money you leave. It’s more about your children having the character, financial nous and understanding NOT to blow it, but to spend and save it in such a way that they can enjoy it sustainably.

Preparing the next generation for the responsibility of inheritance is one of the most valuable things you can do as a wealthy parent. Don’t wait until they are old enough to lose it all like newly-minted lottery winners.

1.   Start talking about money

You may have been taught that it’s vulgar to discuss money, but that’s one lesson you can ignore. Make your children aware that they will eventually inherit the house, the business and other sources of their family wealth. Stress, in an age-appropriate way, the responsibility that comes with financial good fortune.

If all goes according to plan, they’ll be well into middle age before they need to worry about it. But tragedy can strike at any time, leaving young adults woefully unprepared to handle life changing amounts of money, and without the protection they would be afforded if they were still children.

Make sure your inheritors know how you are planning to pass on your wealth. You may be planning to divide it all up equally, so each of your children receives an equal part of your wealth. Or you may be leaving a chunk of it to a charity, a distant relative or family friend. You don’t want your kids finding that out only when they sit down with the executor after your funeral.

A 20-year study by The Williams Group in the US found that a lack of honest conversations was the main cause of family wealth failing to endure — i.e. dissipating within two or three generations, along with family relationships.

Any fan of the TV series Succession will understand how this can affect the family dynamic.

2.   Embed family values

Your inheritance should be about more than money. Whether you built your wealth yourself or inherited a large part of it from previous generations, you won’t want your heirs using it to finance dodgy ventures or support causes which are totally against your values.

This doesn’t mean laying down a list of rules. Talking to your kids when they’re young about what is important in life — caring for family, kindness, charity, looking after those less fortunate than themselves, working hard — is something that all parents can do, regardless of their net worth.

Hopefully, those values will give them a good foundation for a successful life as an adult, as well as provide a basis for dealing with their inheritance.

3. Help them understand how money works

Financial literacy is woefully inadequate in the younger generation (it’s not so hot with many older people, too).

Unless they’re studying Further Maths at A level, not many teenagers will grasp how compound interest works — yet it’s a vital concept in growing money via investing as well as owing money on credit cards. The vast majority of young people will encounter one or other of these activities as they get older.

Teaching children how to budget and delay spending gives them a valuable skill that can help prevent financial disasters later in life.

Pocket money could be split into three different pots – one to spend now (sweets, comics, small toys, for example); one to save for something later on (perhaps an expensive computer game, a pair of trainers or spending money for holidays); and one for giving (such as buying birthday presents for family and friends, or giving to charity).

When they’re a bit older, perhaps you could add up the money you consider it reasonable to spend on their mobile phone, travel and entertainment, put it in their account and let them manage it themselves.

Encourage them to get a part-time job when they’re old enough and make the connection between working and having money to spend.

4. Ease them into it

It’s a good idea to get your kids into the investing habit before they start their working lives. One way is to start an investment account as a nest egg in their late teens. They can make the investment decisions, and you can match the returns for a few years. This will demonstrate the value of compound interest and also the cost of taking all the money out and spending it.

As your kids get older, you could gradually increase their involvement in the management of the family wealth and the decisions you take. If you envisage them taking over the family business, perhaps let them attend some of the board meetings so they understand how the business is run. When it’s their turn to take over, it won’t be such a shock to the system.

5. Bring in the experts

As soon as your kids are ready to take responsibility for their own money, introduce them to your financial adviser or wealth manager and get them involved in the rudiments of estate planning. Let them sit in on the annual review meetings so they can see the value of the estate and appreciate how it has grown and how your investment decisions have affected the overall value.

Not only will this make them part of the future, it will also back up the advice and education you have been giving them up to now. If a professional agrees with mum and dad, you must be doing something right!

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