Creating And Managing An Inheritance

Leaving an inheritance for our loved ones is a common aspiration for most of us. But any inheritance brings with it a unique set of challenges. They crop up at every stage of creating, handing down and handling an inheritance. But we seldom recognise these challenges. As a result, most inheritances or any other form of generational wealth do not last long. Therefore it is important for us to recognise these challenges are. We also need to know how to tackle them. Only then can we make best use of any inheritance we create or receive. And these are the aspects I am going to talk about today.

Creating An Inheritance

We must first realise that an inheritance must not come at the cost of compromising on our own needs. We must also remember that the size of our inheritance is not important. It is how the inheritance is created that matters. Inheritances in India commonly take the form of fixed deposits, rental real estate and gold. But each of these asset classes either fail to beat inflation or only beat it marginally over the long term. This means that the inheritance would likely lose purchasing power faster than it would grow. Such an inheritance is therefore highly likely to be insipid in real terms. We must ensure that any inheritance we wish to create is built to have a reasonable chance of matching inflation. Only then can it grow and be preserved for posterity.

Managing An Inheritance Strategically

We must first objectively view our financial realities. It would then be prudent to incorporate them into a clear plan to handle our inheritance. The plan must be easy to understand. It must allow the inheritance to be managed with minimal effort. It would therefore be prudent to align the corpus to a clear asset allocation strategy.

It would be prudent to prefer financial assets over traditional physical assets for the inheritance corpus. A mix of index funds and liquid funds typically represents the most prudent way to construct the corpus. Residual monthly savings available after investing for all our major goals (if any) may be channelled towards the corpus. It is also vital to regularly review and make changes to our asset allocation whenever our financial realities change. Adopting such an approach would help us manage the inheritance with conviction.

Being Responsible Recipients

The onus of managing an inheritance effectively does not fall on the creators alone. The recipients of an inheritance also have as much of a role to play in this regard. Those of us that recieve large inheritances not only become its recipients but also its custodians. We automatically assume the responsibility to use the inheritance well and preserve it for our successors. But this does not usually happen for a few important reasons. Firstly, recipients of an inheritance may not have the right kind of financial education. This does not allow them to handle money the right way.

So they are likely to spend the inheritance soon after they receive it. This leads to rapid and irreversible depletion of the inheritance received. Therefore, it is important for recipients of an inheritance to employ it in adherence to an asset allocation. This ensures they are aware of the right ways to handle the inheritance they receive. Recipients may sometimes have learnt or been taught the relevant skills to handle the inheritance. But they may lack confidence in their ability to use those skills. This sees them show an aversion towards taking risks and making relevant decisions themselves. They just allow the inheritance to sit idle in the same way they had received it. This may not seem like the worst thing to do.

But this approach ignores one important fact. The realities within which the inheritance had been created may have changed by the time we receive it. As a result of this, the approach our predecessors used to create the inheritance may not produce the same results when we receive it. This shows that we must reassess the financial realities within which we would be receiving and handling our inheritance. We must then take the relevant decisions to manage our inheritance in light of our prevailing realities.

Summing Up

Managing an inheritance requires a lot of forethought. The onus of managing an inheritance well falls on both the creators and the recipients of the inheritance. But this exercise is usually undertaken through the use of archaic methods by both creators and recipients. This needs to change in today's day and age. It would allow our inheritances to grow steadily and consistently without losing value over time. Having the right kind of financial education is of paramount importance to being able to manage our inheritances well.

Taking care of all of these aspects would ensure that our inheritances are created the right way. They would then be aligned to sustainably beat inflation. It would mean that those who receive inheritances would be well informed and fully equipped to handle them. It would allow recipients to put their inheritances on autopilot. And this would be done in alignment with their financial realities. All of this would mean that the wealth we receive or leave behind for others has the best chance to sustain itself for a number of generations to come.