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  • Writer's pictureAkshay Nayak

The Lowdown On Inheritance Management

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.

First, let us focus on creating an inheritance the right way. We must first realise that an inheritance must not come at the cost of compromising on our own needs. Once our own needs are provided for, we may look to create an inheritance for others. We must also remember that the size of our inheritance is not important. It is how the inheritance is created that matters. Most inheritances in India 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 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 consistently beat inflation. Only then can it grow and be preserved for posterity.

In the quest to align our inheritance corpus to beat inflation, we may allocate most of our corpus to growth oriented assets like equity. Equity as an asset class undoubtedly beats inflation over the long term. But allocating the majority of our corpus to equities would be nothing more than a knee jerk reaction. This increases the chances of us losing our capital. And such losses are likely to be permanent. Creating an inheritance requires a balance between ensuring safety during testing times and sustained growth over the long term. Therefore we must create an inheritance in alignment with an asset allocation strategy. The strategy should be based on our risk profile, the intended beneficiaries and the preferred mode of transmission. Only then can we create an inheritance that is both substantial and lasting.

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.

Such recipients 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 concepts such as saving, investing and 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.

To illustrate, assume that my grandparents built up a large corpus by investing in fixed deposits. And later I received a slightly larger amount by the time it was passed down to my parents and then to me. But, today the rupee is worth a lot less than it was in my grandparents' time. And inflation is still significant enough to be a worry. Therefore I cannot afford to simply continue to park my inheritance in fixed deposits, since fixed deposit returns in real terms would be paltry at best. This just goes to show 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.

Doing all of this requires a clear strategy. This is where seeking professional help would be of immense value to us. Working with professionals would allow us to objectively view our financial realities. We can then work with them to incorporate our financial realities into a plan to handle our inheritance. Using professional help therefore allows us to put our inheritance on autopilot in the right way. It would also allow us to regularly review and make changes to our plans as and when our financial realities change. Working with professional advisors therefore means that they bring in the forethought required and help us chart out an appropriate strategy for our needs.

And because we would be doing everything in accordance with the strategy, we would have a clear idea of what we are doing. This in turn would help us develop conviction in every decision we make with regard to managing our inheritance.

Managing an inheritance is therefore a lot more tougher than is apparent. 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. Those of us who cannot devote ourselves in the right way to this exercise can consider making use of professional aid.

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.

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