Being the heir to a fortune does not guarantee a lifetime of riches. This is according to a PwC 2016 Billionaires Insights report that showed that 70% of inheritances are squandered in under five years – with 60% of the fortunes being lost through poor communication and lack of trust among family members.
To demonstrate how quickly a fortune amassed over a lifetime can be spent and to encourage families not to shy away from having conversations about money, Sanlam Private Wealth recently put the children of two wealthy South African families through a compelling real-world simulation.
Jamey Lipschitz, Head of Wealth Management at Sanlam Private Wealth, says the world is about to see the largest ever intergenerational transfer of wealth. “Over the next 20 years, 500 super-rich will transfer about USD 2.1 trillion to the next generation. With the stats saying a huge portion of this will not be preserved or grown by heirs, we wanted to understand why this keeps happening – and what can be done to fix it.”
Lipschitz says the two chosen families each have a set of healthy, happy kids enjoying the kind of privileged life that only the dreamiest ‘Rich Kids’ Instagram accounts are made of. “Thanks to their sizeable inheritances, the kids fully expect to continue their lives of opulence until their dying day. But the stats say there is a seven in 10 chance these wealthy heirs will soon lose their fortune.”
The offspring were ‘locked’ in a bank vault, surrounded by their full fortunes in cash – row upon row of gleaming piles of R200 notes. Following prompts on a screen, they systematically packed bundles of notes away for taxes, estate duties, start-up costs for business ventures, buying cars, houses, clothes and trips. One put money away for a Bentley, another exhausted her cash before she’d bought a home for herself, another never factored in any money for food.
Within minutes, the vast majority of the fortunes had been ‘spent’, leaving the now deflated children facing the prospect of a far more modest lifestyle.
Lipschitz says while there is no easy fix, a big part of the solution lies in opening up the channels of communication, and having those ‘courageous conversations’ about money that so many families shy away from. “Unfortunately, dwindling fortunes don’t only impact immediate families – the broader societal and economic impact on a country can be catastrophic since wealthy make major contributions in the form of employment, profitable businesses and investments.”
Experts such as psychologist Angela Hough-Maxwell agree, “What’s needed is a dialogue around family values and stories in general, with wealth being just one aspect of a larger conversation. When children are given everything too easily, the value of money is lost, and there’s not enough adversity to build resilience. Social media exacerbates this – our worth is externalised according to what we see online, rather than an internalised sense of self.”
Marteen Michau, Head of Fiduciary and Tax at Sanlam Private Wealth, says there is a need for different generations to hold a round-table discussion sharing stories, and agreeing on values and long-term goals in order to create a family manifesto so there’s a clear wealth plan in place. “25% of wealth is lost because heirs are unprepared to inherit. We’re hoping our simulation will start the open discussions around wealth that could change this.”
The Sanlam Private Wealth simulation was recorded and is available to view online. It forms part of a larger initiative that allows individuals to interactively assess how their own inheritance will be spent. Expert guidance from a team of multi-disciplinary professionals on how to make wealth a lasting legacy is also available. Visit www.thefamilyfortune.co.za