Wealth Management is the creation, enhancement, preservation and distribution of wealth. Even if the first foundation can be built by first two pillars, the sustainability depends on last two pillars.
“In the long run, it’s not how much you make, it’s how much you keep, and how many generations you keep it,” rightly stated by multi-millionaire entrepreneur and educator Robert T. Kiyosaki, author of worldwide acclaimed book ‘Rich Dad Poor Dad‘.
Always there is one generation who is the creator and accumulator of wealth. And the coming generation avails the fruits of the same. What is wealth? Or, what is the first thing that comes to your mind when you hear the word ‘Wealth’? The most obvious phrase that comes to one’s mind is that ‘Health is Wealth’. We all agree that health is the greatest wealth, but to remain healthy we require wealth. During the earning phase of life, one must create wealth to be in good health in later half.
Wealth cycle starts from ‘income’ which one earns for the productive engagement of resources through job, business and investment. Then comes ‘savings’, which is the part of income not consumed. Investment, in turn, is the productive placement of savings. The how, where, and when of investment are taken care by Financial Planning which is the process of achieving one’s financial goals through management of personal finance. This should be considered by everyone.
The wealth is ideally the remainder after meeting the financial goals which one intents to transfer. Thus, Wealth Management is the creation, enhancement, preservation and distribution of wealth. Even if the first foundation can be built by first two pillars, the sustainability depends on last two pillars.
So here comes the question on how to transfer and preserve the wealth to future generation? This leads us to Inheritance Planning which includes Wealth Transfer and Wisdom Legacy.
The Wealth transfer is achieved through Estate Planning – a planned and systematic approach to transfer accumulated wealth in an efficient manner in the interest of the intended beneficiaries. In India, we have three major inheritance laws – namely, The Hindu Succession Act, 1956 (applicable to Hindus, Buddhists, Jain and Sikhs), Mohammedan Personal Laws (governing inheritance of Muslims) and Indian Succession Act, 1925 (applicable to Christian, Jews and Parsis).
Another way to transfer the wealth is through Will. Will is the legal document that states how the property and wealth would be distributed after the death of testator (creator of will). The Legal Will supersedes all the mentioned acts.
The other way to transfer the wealth is through establishment of Trust. Trust is the legal vehicle where the wealth and property are transferred to the trustees for the benefit of the final beneficiaries.
One more way which one can contemplate to transfer the property is through Gift Deed. A gift deed is the document stating and recording act of giving the gift (giving the gift) from the donor to the donee (recording the gift). The wealth can also be transferred through making the beneficiaries as the joint holder in the property/asset which you want to bequest. The least preferred method for transferring the wealth should be making the beneficiary nominee. Though the nominee takes the amount subject to any claim or right of the owners, the title to the assets is not absolute. In other words, the nominee is not legatee or beneficiary under the Indian Succession Act.
Let’s discuss the more important and perhaps one of the neglected aspect, the Wisdom and Value Legacy related to wealth. This should be inculcated over a period of time, ideally starting from childhood. It is not only sufficient to transfer the wealth effectively, also important is the how this transferred wealth is efficiently used. The beneficiaries or heirs should assume responsibility for the wealth, value the efforts that has gone in creating the wealth and should possess wisdom to spent, preserve and further enhance the wealth.
The Real Challenge
So, the challenge is not in transferring the wealth which can be taken care by your wealth and tax consultants, the real challenge lies in the time and effort that should be put in preparing the heirs to preserve and manage the wealth. The value systems of the family should also be part of Legacy Transfer. The heirs should be part of the process of comprehensive financial planning and should be aware of its importance for sustaining it in the future. They should also be encouraged to fulfil their dreams, should be provided with necessary financial and moral support and continuously fed with the idea of wealth creation which would entirely be of theirs. This is when, they will value the time, efforts and sacrifice that go through in creating the wealth after meeting the financial goals.
The key to sustainability of wealth across generations is financial wisdom. Hope you follow the same.
(By Seemita Bose Chowdhury, Assistant Professor, & Krupesh Thakkar, CFA, Assistant Professor, ITM B School, Navi Mumbai)