The risks associated with Sudden Wealth Syndrome (Part 1: the risks) are well documented and threaten the more than $750 billion in inheritance Canadians expect to receive over the next decade.
There are two critical steps families should take to improve the odds of preserving the family fortune:
Kids with financial savvy have better chances of becoming fiscally responsible adults. There is a wealth of information available on how to teach kids about money with minor variations. The common factor: start mentoring while children are young, habits can form as early as age 4; and no matter what a parent teaches, it’s parents’ own fiscal behaviour that will impact a child’s learning.
Think back…for most of us, our relationship with money was formed at a very young age and has defined a very large part of our lives. Parents always strive to provide the best for their children; some choose to fulfill wants to compensate for their own childhood lack, others deprive in order to teach value. The healthy route is somewhere in between and we found The Secrets of Raising Financially Savvy Children to be especially insightful, informative and helpful.
Parents, too, need to be confident their own financial decisions are based on the best information and guidance. When older children see their parents working with professionals to develop an effective wealth management strategy, they will likely adopt the same practice later in life. And when parents have a clear picture of their own finances, the advice they most need to pass on to their children is easily identified.
Live by example.
Define your goals and priorities
Many families have only a vague notion of what they want their wealth to accomplish – say, to retire comfortably, or leave something for their children.
Sudden Wealth Syndrome thrives on this lack of clarity.
If you have a vision of how you expect your money to be spent after you’re gone, then your children need to understand what you want for them: is it an education, a first house, care for another family member? Without guidance, it’s easy for your children to squander their inheritance.
So it’s critical for parents to specifically plan how they want their money spent and how they want their possessions handled. The primary tool is a will. Start by listing hard and liquid assets. Knowing exactly what you have makes it easier to decide where you want it to go. This greatly helps parents to identify their priorities. Consider making the primary beneficiary of your will a trust.
A trust can manage your wealth when you’re no longer able to; and it is a particularly effective tool to minimize the risks of Sudden Wealth Syndrome. Conditions can be stipulated to dictate the beneficiaries’, usually your children’s, short and long-term access to it.
For example, an annual living allowance for several years, example: up to age 25, could provide young adults with the necessary time to digest and plan the use of their new wealth. Withdrawal exceptions could be established to accommodate, for example, the costs of education and/or healthcare needs. Investments could be safeguarded for the benefit of, example, existing and/or future grandchildren. With very few limits, it’s a highly customizable financial planning tool.
There is no guaranteed way to prevent Sudden Wealth Syndrome, but these two critical steps can strengthen and preserve your family’s financial standing and mitigate the risks associated with the condition. With professional guidance, these first steps can pave a life path that protects your wealth now and long into the future.