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By Brenda Ward
Odd as this may sound, wealth can do more harm than good, says authorised financial adviser and psychological therapist Paul King of Auckland Financial. “Wealth changes everything – it changes us, it changes our families, and it changes how our children and grandchildren grow up.
“I’ve seen families spiral into bitter conflict and wealth simply disappear. I’ve seen people traumatised by the responsibility of sudden wealth. And if you haven’t heard of a family at war over money, or a lottery winner blowing it all, I’d be surprised,” he says.
A legacy isn’t compulsory
Private Wealth Advisers’ Jack Powell says you don’t have to pass your money on to the next generation. You could just spend it.
He sees many people who are afraid of running out of money in retirement, so they don’t spend enough, and get little enjoyment out of their lives after finishing work. Unintentionally, they end up leaving a large legacy for their families.
“Seventy per cent of my time is spent trying to convince people to spend more money. It’s a great job to have,” he laughs.
But some people do want to share their money with their family. So how do you ensure a clean and stress-free transfer of wealth?
What’s yours is mine is ours
King says it pays to remember that families are just a collection of individuals who share genetic traits and some common experiences. They may not have the financial skills to handle money wisely.
Susan Pumfleet of ShareNZ says blended families
have also made inheritances more complex these days. “Now it can be about ‘yours’, ‘mine’, and ‘ours’. It’s important to be fair to everyone.”
She says leaving inheritances to chance can destroy family relationships. “You need to have those discussions before it all turns to custard.”
Powell agrees, and says inheritances can sour even close relationships. “The experience that I’ve had where families were very close is the problems are not due to the family. It’s the in-laws.”
So he sets up family meetings. “I recommend we have a meeting with the kids as well, so the kids know what’s sitting there and what the parents want to happen to their money when they pass.”
Powell says he understands it’s a difficult and uncomfortable discussion to have with close family, but notes it is better to have the discussion while everyone is still at the table, and not leave it until the matriarch and patriarch are gone. Set up a meeting and express your wishes openly so all family members know how you’re planning to leave things. That way there are no surprises at what is always a difficult time.
Wills and trusts
If you die intestate (without a will), you may think your partner will inherit your wealth. But in fact your estate comes under the Administration Act 1969, and will be divided between your partner and surviving children; your parents will receive the estate if you’re single.
Pumfleet advises people with wealth to put their assets in a trust, to avoid complications. Otherwise, widows are often the ones who suffer.
“So often it’s blatant to see in hindsight, but they didn’t realise. In my experience, women aim to protect their children and their children’s interests first.”
And it’s important to update your will, Pumfleet says. “The law has changed several times, so a will that was written 25 years ago may not be valid now.”
Powell also suggests setting up a trust. “If you’re considering whether to have a will or a trust, I’d always recommend a trust, because a trust survives you, but a will only lasts until you’re dead and then whoever wants to challenge it can challenge it.”
But he also sees a lot of mistakes made when trusts are established. “People often appoint a lawyer as their professional trustee who’s the same age as they are. If you’re planning a trust to survive you, you need a person younger than you to be the other trustee.”
Consider, too, the consequences of passing wealth on to your children, says Powell.
“One of the most common things I’ve seen in high-net-worth families is depression in the next generation. They can’t fail, so they don’t try in life and become depressed. It’s common among the ‘trust-fund babies’.”
Family businesses at risk
King says family businesses can be vulnerable when one generation takes over from another.
“I find that the ‘Law of Family Wealth’ often applies: the first generation makes it, the second uses it, and the third loses it.”
This ‘law’ is especially true with businesses where the children work in the family firm, he says.
“It’s often the case that by the third generation, there can be a lack of drive to succeed.”
Powell also warns of the fishhooks that catch families out in passing on a business.
“Take the example of a mum-and-dad one-million-dollar business and four kids. One kid stays in the business. That child should buy 75 per cent of the business, otherwise the other kids will never get an inheritance. The business may fail and the funds will be gone.”
Powell says the successor to the business doesn’t have to be a family member – it could be an employee. Powell’s advice is to offer that person favourable terms and encourage them to stay. Meanwhile, discuss with family members how they’re going to get their inheritance out of the business.
Your inheritance: get your house in order
If you’re likely to inherit someone else’s wealth, remember it’s not yours until it’s yours, says King. “You can, however, decide to be interested and start asking questions. Rule number one is don’t make any assumptions and don’t plan your future around it.”
Pumfleet says: “Leaving no will can cause tremendous hardship for families. Too many people just say, ‘I’ll get around to it.’ Get around to it now!”
Powell says that a good financial adviser should be guiding you on how to pass wealth through the generations. “I spend a lot of time educating the younger generation so they have a basic level of education before the parents die. If everyone knows how it’s all going to go, it’s a much cleaner transition.”