Wealth transfer: Think carefully before you give

Let’s suppose again that I give my son a brand new BMW for his first car. What am I likely to take away from him? Likely life experiences that would be far more valuable to my son in the years ahead than the car.

I probably took away his ability to set realistic controls on his spending and deny him the opportunity to savour the satisfaction of working hard and saving up methodically to buy his first car.

I may have also taken away my son’s ability to appropriately connect a healthy work ethic to its material rewards. I have seen these kinds of gifts made many times by well-intentioned parents that only ended up producing a net-loss life-effect for them. 

As such, wealth transfer planning must also include preparing and educating the next generation with essential wealth management knowledge and fundamentals in order to achieve responsible wealth management, wealth preservation and hopefully growth.

The common practice of providing the means for the best school/university, graduate degree(s), and opportunity to work for reputable companies and/or join the family business may not be enough or in time for the next generation to be ready for great wealth.

Two key factors in wealth management knowledge and fundamentals are timing and comprehensiveness with real-life application.

On timing, it’s important to learn and appreciate the concept early in life as it helps to build the young ones into who they become and will have a lasting impact on how they live, work, invest and preserve.

In comprehensiveness, one cannot only learn from books, cases, classrooms, instructions or professional interactions. All of them are essential to gain a full understanding of the concept.

As part of comprehensive learning, it’s important to apply the concept to real life – start a savings programme with investment catered to long-term wealth planning. If that’s not possible, working on cases and interacting with real professionals from a special wealth internship programme in reputable banks can be equally beneficial.

Furthermore, the question that is almost never addressed by people in wealth transfer planning is whether an inheritance is something that we owe to our heirs or is an optional gift. This is important because it involves two vital issues – the amount and timing of an inheritance.

If you want to help them get a good head start in life – by helping them with college, getting their first house, getting a business started, maybe helping send their kids to a private school – these needs come earlier in life, not when the parents are 85 years old and the children are 60. 

So, if parents are looking to fund opportunity, the idea of lifetime inheritance planning becomes essential and the children’s inheritance will be given in planned amounts for specific reasons to help them along the way as the needs and opportunities arise while the parents are still around to observe, monitor and coach their heirs.

Below is a list of the 10 most common reasons for why inheritances are given.

 

Opportunity:

1. Continue the family business, if any

2. Start up a business 

3. Make a down payment or pay off the mortgage on a first home

4. Set aside an emergency reserve 

5. Pay tuition for children/grandchildren’s education

6. Donate to charities

 

Lifestyle:

7. Provide recurring income for a desired lifestyle

8. Pass on family property or the funds for other personal property

9. Pass on the family residence, holiday home or other property

10. Provide recurring income for special needs or disabilities

 

Add up the amounts and you might be quite surprised at the outcome. If it is appreciably different from how your current inheritance plan is set up, I would encourage you to take steps to adjust your plan accordingly.

 

_ Vira-anong Phutrakul is managing director of retail banking at Citibank