Having substantial wealth does not guarantee an easy, joy-filled financial journey.
This rings especially true for those who come into family wealth via inheritance. Wealthy parents and grandparents are often concerned about potential adverse effects of bestowing substantial wealth upon their children. At the same time, beneficiaries may struggle with the weight of wealth, particularly from losing a loved one.
Inheriting assets often brings complex financial and emotional responsibilities. The first step in dealing with the transfer of wealth among your family is to recognize the challenges that inheritors are likely to face so you can be on the lookout for them – whether you’re the giver or the receiver of assets.
For instance, as an inheritor, you may be confronted with tax implications that can significantly affect the value of your new assets.
While every affluent family has its unique characteristics, there are a few challenges that we see cropping up repeatedly among inheritors of wealth. Let’s review:
A need for financial literacy:
It’s common for inheritors, or those set to inherit, to lack a deep understanding of their finances or financial concepts. This knowledge gap can result in a disconnection from their wealth and vulnerability to financial missteps or exploitation from financial assassins.
Bad spending habits:
Inheriting wealth can be a double-edged sword for some people. For those not accustomed to managing significant assets, a sudden influx of funds may lead to reckless spending habits. Without a structured financial plan, these heirs can rapidly deplete their newfound wealth through impulsive purchases and extravagant lifestyles. This pattern of excessive spending not only undermines the long-term growth potential of their inheritance but can also create a complex web of tax implications and potential debt. Inheritors must understand the importance of disciplined spending and strategic investment to preserve their assets for future needs and generations.
Guilt and self-esteem issues:
Many inheritors grapple with feelings of guilt or anxiety regarding their inherited wealth. These feelings can be traced back to a lack of a well-defined self-identity before receiving their new wealth. This can lead to being perceived as an “impostor,” feeling undeserving of the wealth and success associated with it.
Pressure to have a lasting positive impact:
The desire to make a lasting positive impact. Being the custodian of inherited wealth can feel overwhelming, especially when accompanied by the pressure to use it effectively and the uncertainty around the best ways to utilize financial resources and provide support.
Action Steps to Consider
The good news: There are ways to address and overcome these (and other) challenges that inheritors often face. For example:
- Chances are a wealth advisor will be involved in managing inherited wealth. Even so, it’s important for inheritors to develop some form of financial knowledge to make sound financial decisions. Parents and grandparents can impart knowledge about saving, spending, and investing over time. One key aspect to focus on is understanding how money relates to personal values and meaning in life, guiding heirs to align their lifestyles with their and their family’s values.
- Wealth alone should not define an individual. Inheritors – ideally well before they receive assets – should be allowed and encouraged to pursue a life that includes dealing with challenges, exploring their interests, discovering what they’re capable of, and sacrificing in some way. Working, volunteering and other “real life” experiences build confidence, identity, and self-esteem that can potentially help inheritors avoid feelings of unworthiness or isolation later on in life.
- It’s important for inheritors to open up about the challenges that new-found wealth presents. In our experience, inheritors will admit that their new wealth can create feelings of isolation and loneliness at times. Their new affluence can make it hard for them to relate to or bond with existing friends – especially if those people have far less wealth. But such alienation can also occur between inheritors who are very much alike. When families overemphasize privacy concerns or tell their children to hide their fears and concerns from others, it can stunt meaningful social and emotional connections to others that we all need. That, in turn, can potentially lead to depression, substance abuse, and other life altering problems. Therefore, inheritors – and indeed, entire affluent families – need opportunities to communicate, commiserate and share.
- Be an active steward of wealth. True stewardship involves more than preserving family wealth and status – it should also promote and enhance values like entrepreneurship and proactive wealth generation. Families can reduce the risk of heirs becoming overly dependent on their inheritance by fostering entrepreneurial spirits and allowing heirs to gain hands-on business experience, possibly by advancing through the ranks of a family business or by investing in their business ventures through family-funded loans.
Ultimately, family wealth can be a resource to generate excellent good – just as it can be used in ways that lead to personal stagnation or worse. Givers and receivers of such wealth should put their heads together and work collaboratively to help ensure it’s the former, not the latter.
ACKNOWLEDGMENT: This article was published by the VFO Inner Circle, a global financial concierge group working with affluent individuals and families, and is distributed with its permission. Copyright 2023 by AES Nation, LLC.
This report is intended to be used for educational purposes only and does not constitute a solicitation to purchase any security or advisory services. Past performance is no guarantee of future results. An investment in any security involves significant risks, and any investment may lose value. Refer to all risk disclosures related to each security product carefully before investing. Mitch Silberman is a registered representative offering securities and advisory services through Cetera Advisor Networks LLC, member FINRA/SIPC, a broker/dealer and registered investment adviser. Advisory Services offered through Silberman Wealth Strategies, Inc. Cetera is under separate ownership from any other named entity. Mitch Silberman and Silberman Wealth Strategies, Inc. are not affiliated with AES Nation, LLC. AES Nation, LLC is the creator and publisher of the VFO Inner Circle Flash Report.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.