Publication : Business standard, Mumbai; Date: May 17 2009;
Create inheritance goals for your children.
A lot of affluent parents and grandparents are worried about the fate of their family wealth when inherited by their children. The care of money has many enemies — there is greed, taxes, inflation and foolishness and, above all, the traits and sense of the individual who has or inherits money.
Ajay Mathur, a business owner in his 60s, wanted to make sure there is something left for his grandchildren. He felt his family money was exposed to some risks. Risk of mismanagement. Risk of destructive habits. Risk of loss through divorce and marriage. He strongly believed the wealth for which he had worked so hard should not disappear because of any of these problems.
THE PROBLEM
His two children have been a part of the business since their working years, but differ from their father in their attitude to money. Unlike Ajay, who still travels economy class and is frugal in his lifestyle, the sons live a lavish life, blowing up money on exotic vacations, regular first class travel and horse racing. And are always keen to make a quick buck. They have seen money all their life and think they have an unlimited reservoir.
LIMITATION
At the same time, you must not impose your expense patterns or lifestyle on your children. Guide them regularly but let them develop their own money management habits. It is absolutely possible that the child saves and invests well, besides taking exotic vacations. So, keep these parameters in mind before you take an informed decision.
WAY FORWARD
Ajay discussed with his advisers and came up with the following action items. One, set rules on the business and entertainment expenses their children incur. Anything above a certain amount would have to be from their own salary. Two, set a benchmark on the savings every child must make each year. The figure was a realistic 25 per cent of net income and if these benchmarks were not met, there would be no salary revision. Though this might appear restrictive, it was necessary to impose discipline in money management.
WORKING IT
He decided to give his children Rs 1 crore each and set goals for them. He also gave them the flexibility to decide their own goals and make their own cash flow statements and asset management strategy. Ajay would continue to review what they did every quarter or six months but give them the flexibility to do whatever they want to do. This exercise had the potential to unearth if they could manage this or higher sums of money.
Any philanthropic activity by children would be seen as a sign of maturity in money management. This meant the children were mature enough to share their wealth for appropriate causes.
Another method is to create a Trust to hold the family assets till the children are financially mature. The key decision is who would be the trustee and till when.
CASUAL MINUSES
There are also parents who are very casual about their inheritance plans. One says “I do not think much of what my children do after I am gone. It’s their wealth and they can do whatever with it.”
Parents certainly have the choice to leave the money the way they desire but one cannot be so casual about such matters if you see an imminent risk of a financially immature or destructive child. It’s not just the loss of money which took years to create but it could also mean loss of life. In one instance, a 32-year-old child committed suicide when he ran out of money.
Inherited money is extremely precious money because it has taken you a lifetime to create a fortune. At the same time it is unearned money for your children and, hence, they might not value it as much as they would if they had earned it. Your child should have a duty of care for the inheritance and must protect, spend, invest and give away wisely. At the same time, they should be able to pass a lot of it to at least their next generation.
It’s important to protect your wealth from your child’s destructive behaviour and make sure things pass on to the next generation or is put to appropriate use according to your wishes. However, do not be rigid in controlling your wealth from your grave if your children have healthy but different attitudes about money.
The writer is director, My Financial Advisor
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