Keeping it in the family: here’s how wealthy parents can safeguard their fortune
Many wealthy parents worry about the impact their money will have on their children and how to talk to their children about the family’s financial legacy
History is full of stories of families who amassed great wealth – and then lost it all, often when the children or grandchildren embarked on legendary spending sprees, apparently unaware that their money was a finite resource.
For something that is grounded in numbers, money comes with many emotional quandaries. Parents may worry about keeping their children motivated and preventing them from becoming materialistic or acting entitled, or about preserving the family fortune once they have shuffled off this mortal coil.
Neo Kgantsi, a portfolio manager at Sanlam Private Wealth, works with wealthy individuals who face such issues. “We invest money on behalf of private individuals and deal with investment vehicles like family trusts, which are set up to look after intergenerational wealth planning – to pass on the family legacy,” he says.
“Commonly we see a lack of communication between parents and their heirs. They might hide the money – or the extent of their wealth – from their children, because they worry that if their children are aware of how much they stand to inherit, it might discourage them from working hard today and breed a culture of dependency and slothfulness.”
A 2012 study by US Trust found “more than half of high-net-worth boomer parents had not fully disclosed their wealth to their offspring, while another 13% kept completely mum”. No similar study has been completed in South Africa, but it’s not likely to be all that different here.
This lack of transparency has a huge downside, says Kgantsi. “The problem is that once the parents pass on, those kids wake up and find they are multimillionaires overnight. They think they can spend the money as they wish – squander it – and the funds won’t run out. But they do.”
He adds: “It’s far better to prepare them to manage money efficiently. We encourage clients to educate their family about how to pass on their wealth and to teach their children about the value of money.”
To help their clients navigate these choppy waters, Sanlam Private Wealth’s Family Fortune campaign recently took two families through a fascinating exercise. In both families, the parents were concerned about their offspring’s spending habits and lack of financial know-how.
Armed with some knowledge about what their children were likely to do – and buy – in the event of their parents’ demise, they made the children divvy up the family fortune, displayed before them in piles of crisp R200 notes. The kids watched wide-eyed as their riches dwindled to nothing within minutes.
“The thing that strikes me about these families is that there were no boundaries related to money,” says psychologist Angela Hough-Maxwell. “Of course, all parents just want to provide the best for their children, but in these examples we see the kids saying, ‘If I want something, I get it.’ And while parents are trying to be generous to their children, at the same time the children are not learning any boundaries about money.”
She adds: “Having a boundary is useful. It gives a child a sense of the value of money, that it isn’t limitless. How can we expect children to have a sense of the value of money if they never have any limits imposed?”
When it comes to parent-child relationships, wealthy individuals are no different from other parents who have to fight past the glow of smartphones and the lure of social media to connect with their kids.
“It’s becoming more difficult for all of us to connect – with each other and with our children,” says Hough-Maxwell. “We need to put some boundaries in place. Have a place in the house where all the phones go when you want to connect as a family. Eat meals together – without devices. Do things together. And watch your own behaviour – many of us are on our phones a lot because of work, but we expect our children to behave differently with their devices.”
But that’s not enough. Parents must have honest conversations with their children about money.
“Include things like your values and where the money came from,” says Hough-Maxwell. “Children need to develop an understanding about how money works, and that it’s a medium for things of lasting value like health and education. Talk to them about what you want for them, about the future you envisage for them. Take them to work with you so they can see what it takes to produce that money.”
Once you have pegged a certain lifestyle for your kids, it’s hard for them to downgrade
Some parents ensure their children are informed about money and pass on their own good financial habits, says Kgantsi. “Others perhaps grew up in a single-parent family where they were denied many things. Understandably, once they start making money, they want to give their kids everything they missed out on. So the lines get blurred.
“And once you have pegged a certain lifestyle for your kids, it’s hard for them to downgrade. They grow up thinking that money means they must have the fastest car, the biggest house, the best sneakers and so on.”
Hough-Maxwell’s advice is to start when the kids are young, if possible. “They can start with a piggy bank when they’re small, and graduate to a bank account when they’re a bit older. But put boundaries on the amount of money they get. And when it’s finished, it’s finished – there’s no endless supply.”
Kgantsi says the key to securing your wealth for the next generation is to educate yourself, as a parent, on how to manage money, especially in the current economic climate. Learn how to preserve and grow your wealth, and pass those lessons on to your children.
Take the test
To watch the two families’ experiences in the bank vault and use an online tool to track your own heirs’ inheritance, visit www.thefamilyfortune.co.za.
In most cases of intergenerational family fortunes, he says, each generation contributes, builds on that fortune and passes it on to the next generation, where the multiplication continues. That can only happen when parents are transparent about money and the values they espouse around it.
“Fortunately, you don’t have to master all the details of wealth management,” Kgantsi says. “There’s plenty of advice and guidance available in the form of financial advisers and investment professionals who can lend a helping hand.”
This article was paid for by Sanlam Private Wealth