Leaving an inheritance may be a subjective, emotional and a very private decision for every family, but if you are already considering it, make sure you go through the below checklist before going ahead.
If the kids grow up to be discerning adults, they will earn a good living on their own, and if they turn out to be worthless, they will fritter away your hard-earned money.
Despite the inherent wisdom implicit in the adage, most parents want to leave a financial legacy for their children and spend a lifetime trying to build one. Leaving an inheritance may be a subjective decision, but if you are already considering it, answer the following questions before doing so.
1/ Is your own financial future secure?
First make sure you have enough wealth to secure your post-retirement needs and increased medical care costs, so that you don’t become financially dependent on your children later on. Even if you want to improve your lifestyle or fulfil long pending aspirations and dreams with the wealth you have amassed, give it priority. If you want to buy a bigger car or a better house or take a foreign vacation, do it, instead of buying properties for your kids.
Shed the martyrdom, live your dreams especially if your children are better off than you. You have worked hard for it. Now, live it.
2/ Are your planning to pay children's self-owned debts?
If your children have taken debt (like a home loan EMI) and still have a well-paying job, do not feel merciful and try to prepay their loans. You did the same thing when you were their age and probably paid off everything by earning and saving money.
Let them go through the grind. Let them get stronger. Let them learn to save more.
3/ Do the siblings have an amicable relationship?
While you may have your children’s best interests at heart when you decide to leave them an inheritance, do consider their personalities and inter-personal relationship before doing so. If they have always been bickering or are prone to pangs of envy and jealousies about each other’s financial standing, the inheritance, especially if it is property, is more likely to result in disputes than comfort. If there is no love lost between the kids, you would do well to transfer assets and wealth in equal proportion to them while you are still living, instead of making them beneficiaries of immovable properties after you pass away.
4/ Are they well educated and well earning?
If yes, then there is absolutely no need to leave behind any kind of wealth for them, not even during your lifetime. They will just use that wealth for discretionary and unwarranted spends. It is better to use that wealth on yourself or for charity or for gifting on occasions to your children and other family members, relatives and friends as the need be.
5/ Does any of your child have Special Needs?
This is an exception, and you might seriously consider leaving behind an inheritance if you have a physically or mentally challenged offspring, who will need lifelong financial care after you pass away. You will, however, need to ensure that it is left in the form of trusts with proper guardians, caretakers and documentation in place so that the inheritance benefits the child for whom it is intended.
6/ Are you accounting for Geographical Considerations?
Parents and children are typically living in different places, geographies, and countries. Logistically, this is a big challenge because the children may not be interested in managing inherited properties or living in these. if the children have settled abroad and don’t intend to return, leaving behind property will burden them with the tasks of either disposing of or maintaining these.
The administrative overhead costs of getting a clear execution of the inheritance can be a time-consuming affair. If we quantify the opportunity cost on account of the time it requires to do so, it dilutes the inheritance value significantly.
7/ Are you accounting for the tough legal process?
The entire legal process for transferring a property as an inheritance is not understood by over 80% of the population. While most people believe it to be a simple exercise, it is one of the most complex and difficult legal processes.
The entire process of executing the transfer of property as an inheritance is offline and has no online play at all. More importantly, there are multiple legal steps and government bodies involved in this exercise. To add to the complexity, in over 70% of property inheritance cases, there are multiple beneficiaries. Many a times, there is no adequate paperwork, which necessitates a much more complex legal process calling for the physical presence of all legal heirs.
This is not feasible for the working beneficiaries. It also causes a long delay in the resolution of inheritance disputes. In many cases, there is no clear list of beneficiaries, resulting in many more claimants than the actual heirs.
8/ Are you assuming real estate is the 'real' asset?
Property, as an asset class, has been delivering single digit returns. In such a scenario, it does not make sense to leave the property as an inheritance and force the beneficiaries to go through a cumbersome process for the same. It is better to liquidate the property and distribute the share to each beneficiary.
9/ Are you going for classic Estate Planning?
The classic estate planning strategy is to empower the surviving spouse to hold wealth until they too pass away, and the wealth is subsequently distributed among heirs. Consider whether this textbook approach suits your needs. The spouse may be susceptible to cheating or may not possess the financial acumen to manage the wealth.
Summary & My Personal Decision
All the above 9 checkpoints are important before deciding if you need to leave some wealth for your next generation. If yes, how much. If no, how much can you distribute while you are living.
We have decided to spend on quality education and upbringing of our children, and not leave anything for them as inheritance, other than the values, love and some cherished memories. We want to make sure that they remember us for what we were rather than for our money. Let them work hard and craft the life of their own.
This decision, though not an easy one for us, prevents us from major issues listed above. Not only that, but it also empowers our children to be more independent in decision making rather than be constrained with the property or wealth that we leave behind.
[Listen to podcast: Leaving Wealth for your Children]
Still want to be pass on wealth?
If you are financially comfortable in retirement and still have sufficient wealth to pass on to children, make sure to leave it in a manner that it minimizes disputes. Setting up trusts or gifting assets is a more efficient way to transfer wealth instead of property that inevitably creates friction.
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