In South Africa, more than half of beneficiaries are reported to go broke a few months after claiming their inheritances or benefits left by their parents, or from their disability pay-out or Road Accident Fund (RAF). Reasons for misuse can be traced to lack of investment knowledge, poor advice and lack of succession planning. The biggest challenge with such inheritances is that the beneficiaries are usually inexperienced and have never managed so much money before. The kind of relationships a beneficiary has also play a part in how they handle their money. For someone coming from a financially struggling family, they believe it is their responsibility to help everyone in their surroundings, including extended family and friends. In the case of someone inheriting a business, investments and/or assets from family, this comes with a lot of responsibility, and experience is needed to properly manage such.
A healthy relationship with money goes a long way when inheriting money because it requires an understanding of investing and retention. The reason most wealth does not last in the hands of beneficiaries is not always because of carelessness, but more due to lack of knowledge and lack of experience. Parents who wish to leave their inheritance to their kids need to ensure they involve them early in the management. Learning early allows the heirs to make mistakes while being guided, instead of fumbling on their own at a later stage.
Responsibility left with heirs
There is a huge responsibility left with heirs, to manage the wealth, pay bills, follow up on unpaid debts and collect from debtors. This responsibility can be overwhelming for someone with no experience. You find that some will be meeting with the family Financial Planner for the first time, and don’t know what is expected of them and there is no trust in the relationship. Following through can be quite a challenge if the relationship is still at inception, and following guidelines can be challenging for the beneficiary as the relationship may feel forced at times.
What heirs and beneficiaries need to avoid
Lifestyle inflation: Instant gratification is what causes lifestyle inflation to creep in. Wanting people to know you are wealthy is the easiest way to lose your money, as you spend on what you do not need.
Poor advice: Relying on sales-driven advisers is also one of the contributing factors. Sales executives, insurance brokers and car dealerships are always ready to advise heirs to spend their money on expensive items like luxury cars, unnecessary insurance products and credits they do not need.
Get-rich-quick schemes: The fastest way to lose money is joining schemes that promise quick returns after a few days. These schemes are there to scam people of their fortunes and their hard-earned money.
There are two critical underlying contributors to inheritance issues.
Lack of knowledge: Most beneficiaries have minimal to no information about investing and/or handling money in general. An unemployed high school graduate with no higher qualification is most likely to make financial mistakes with their pay-out, not because they are irresponsible but because they lack knowledge. As financial literacy is not included in the school curriculum, school leavers have no financial management knowledge. Lack of investment knowledge is the reason why some beneficiaries put their money in alternative choices they see fit. These alternative choices may not be as legit and may subsequently lead to loss of income.
Lack of planning: Without the right guidance, money can be very confusing and may lead to destructive decisions. Spending before saving is inevitable, spending on the wrong items or, even worse, investing incorrectly. Planning and getting the right guidance from a professional is crucial to avoid all these costly mistakes.
Assisting heirs to keep their inheritance
As financial planner, get an introduction to the family as early as possible. This will assist in building the relationship early and a profound foundation can be laid.
Involve beneficiaries in the decision making and in the transactions. Aspouse and kids need to have some knowledge about how finances are handled for future purposes. They need to understand that the head of the family will not always be around and some day they would be solely responsible for how things function.
Encourage beneficiaries to attend financial therapy sessions prior to receiving their inheritance and post receipt. This helps to identify their relationship with money, their money fears and deep-seated traumas, and to deal with them accordingly. Then the counselling and planning needs to be ongoing to ensure a smooth transition.
Help them to plan for a life beyond the inheritance. Make sure they plan a life that is independent of their inheritance, such as a career or a business. This will ensure that even if the money runs out, they will still have a life not tied to the inherited wealth.
Think long term. Encourage beneficiaries not to limit thinking to the pleasures of today, and to stretch their plans to include their future, marriage, kids and kids’ education, even leaving wealth after they pass on.
Beneficiaries need to understand that no matter their age, wealth preservation should be at the centre of their financial plan. Preserving wealth guarantees financial freedom. Understanding that sacrifice today buys more power tomorrow needs to be engrained in their minds to do away with instant gratification.
