Most people think of lottery winners as incredibly lucky individuals. They may be lucky, but their winnings don't necessarily translate into long-term happiness. In fact, several studies have shown that their happiness quickly dissipates. For instance, one study found that lottery winners' happiness spiked when they won but returned to pre-winning levels after just a few months. What's more, 70 per cent of lottery winners see their entire fortune disappear within seven years, and one per cent of small-time winners go bankrupt each year.
High net worth individuals looking to pass on wealth to their heirs need to be mindful of these trends to ensure that wealth is sustained by the next generation.
Sometimes the heirs are not be prepared to assume a large amount of wealth all at once, which predisposes them to the lottery problem.
Others are prone to making the same costly mistakes that lottery winners do when managing their wealth, such as trusting individuals with their money and not taking the time to become financially literate.
Here are 10 tips to get you started:
Assemble a team: The most important step in securing long-term wealth is assembling a team of trusted advisers, including certified accountants, registered investment advisors and other professionals, instead of trusting in a single individual or professional to handle all of your finances.
Develop financial literacy: Financial literacy is extremely important to avoid costly mistakes. For instance, overpaying by a fraction of a percent each year for asset management can quickly add up to hundreds of thousands of dollars.
Maintain open communication: Merrill Lynch found that less than 40 per cent of parents with more than US$5 million communicated their plans to their children, which opens the door to significant misunderstandings when the inevitable happen; communication is key.
Establish a purpose: It's important to establish the purpose of wealth–philanthropy, business opportunities, education, family vacations, etc–in order to set expectations from the start.
Explain the rationale: Some wealthy individuals prefer to shroud all their financial decisions in secrecy, which can strain relationships with families and friends. Transparency can help avoid these problems, although that doesn't necessarily mean treating everyone equally.
Don't give without a reason: Many wealthy individuals give stipends to family members in the form of an allowance, but this behaviour can establish unrealistic expectations; withholding allowances can then become a touchy issue.
Focus on outcomes: Many financial advisers try to push a chronological timeline for wealth building over the long term, but clients may be better off with an outcomes-based approach whereby they focus on what the money is actually being used to accomplish.
Don't forget to give: Philanthropy is a great way to maximise the value of wealth by spending it in the best possible places. According to a number of studies, philanthropy also promotes the wellbeing of the person giving the money.
Failure is OK: Wealthy parents may want to treat failure as part of the process rather than treating it as something that should be avoided in order to raise more resilient children that are likely to be better custodians of capital when the parents pass away.
Try to be fair: Money is always a touchy subject, especially among family members. In general, parents should try to be fair when dispensing money, although fairness doesn't always equate to equality (eg a parent may pay for tuition, but the length of schooling may differ).
Investopedia