Published Article Details

As you near old age, plan how to divide your wealth between retirement, charity and legacies

Posted by: Uma Shashikant on Jun 12, 2017, 06.30 AM IST

By Uma Shashikant

Last week I spoke to a group of working professionals who will retire in the next five to 10 years. There was a time when retirement was not a very pleasant prospect, as people felt anxious about going without work. Then there was the phase when everyone wanted to know if they had saved enough and would outlast their money.

Now, the most asked question is about inter-generational fund transfer. An emerging, and perhaps a large group of investors, have saved enough to last their retirement and beyond, and wonder how to best redistribute their wealth.

There is a combination of positive factors working for this group of professionals. They lived through the pre-1991 age of scarcity and shortage, and are therefore dedicated savers and frugal spenders. Their income and its growth have been high. Many have valuable Esops and equity in their business.

Self-employed professionals like doctors, lawyers and architects have seen steep growth in incomes and are sitting on an unexpectedly large pile of wealth. It all seemed small when they began, just enough as the children grew up, and suddenly after the children left home, there seems to be too much of unused wealth.

One couple told me that they now save 90% of their income, as they have no rents to pay, no cars or goods to buy, and no fees and tuitions for kids or their activities. Many of these people have also been active investors and have benefitted from the stock market boom since the 1990s.

Their problem of plenty is simply this: they kept saving and setting aside money for the children, and it now looks like the children do not need the money after all. The children of this group of people have done well for themselves too, are comfortably placed in jobs and careers that pay well.

More importantly, they urge their parents to spend the money they have saved in travelling the world, and are not too eager to inherit the accumulated wealth.

There are exceptions, as will always be. I did hear stories of the eagerness about their inheritance when the next generation begins a family. Anxieties around providing for their children in turn, led some to asking grandparents for financial support to put the grandchild in a private school, for example.

And then there was the story of siblings eyeing the prime property in Mumbai and the unwillingness of the parents to sell and move out of the comfortable house for the sake of the children.

What should this generation of unexpectedly wealthy 50-somethings, who want to be fair and equitable to all, including themselves, do?

First, determine how your pie will get divided. A portion would be needed for your retirement; a portion would go away in taxes- depending on the regime you are subject to; a portion would be your bequest to your heirs; and a portion should go to charity. Philanthropy is a satisfying, sensible and responsible choice for the wealthy who have more than they can use. Put a number in today's terms on each of these allocations.

Second, plan how these assets will be held and transferred. The funds you need for your retirement can be held in financial assets so that you are able to draw on them when needed. The bequest, if in the form of property, involves a good amount of paperwork before your children can get the title in their names.

The money you want to earmark for charity needs to be allocated, preferably into a separate legal entity, so that it is not misused after your time. It takes time and effort to set up and complete the paperwork that matches your plan for specific beneficiaries. Get down to doing it early.

Third, understand the tax implications of your decision. Especially if your wealth is held across countries, or if your children live in other tax regimes. Some regimes have taxes on inheritance; the treatment of dividend and interest can differ; capital gains taxes apply differently and at different rates; and gift tax provisions are different too.

For example, if your child inherits your property after your death, the date and cost of acquisition is the date of such transfer in some regimes. This means there is virtually no capital gain if the heir chooses to sell soon after. In other regimes, the date and cost of acquisition remains the original purchase, ignoring the bequest, and capital gains taxes are payable if the asset is sold.

Fourth, consider the choice of writing a will, or setting up a family foundation or a trust which will hold your wealth. This structure can offer tremendous flexibility. For example, you can decide that only income from your investments will go to your children, while the principal amount goes to your grandchildren, or to charity.

You can also name beneficiaries who are not your heirs-your faithful staff who served you over the years, your near and distant family who are not as well of as you are, your friends who have stood by you and can do with some support-can all be named as beneficiaries if you create a separate legal entity that holds, manages and distributes your wealth.

Fifth, take the bold step of deciding to give and distribute when you are around. The fear of outliving the wealth is true for those who did not earn or save enough. Not for those who have enough accumulated wealth. Gifting is favourably taxed in many regimes. Charitable giving is also eligible for tax benefits. Not to mention the joy of giving and the satisfaction of seeing one's money being put to beneficial use.

Sixth, do not postpone the discussion about your wealth with your children. If they are old enough to earn, they are old enough to know your net worth. Let them know that it is your wealth to decide what you want to do, while understanding their views and concerns. Especially if you intend to give away a portion to charity.

The majority in the group I spoke to had dividend paying shares, deposits and property as wealth. They were primarily conservative in their approach, while being cautious equity investors. Beyond the default choice of leaving it all for the children, they did not seem to have a plan. Do not belittle the accomplishments of your children by permanently subsidizing them and undermining their sense of worth. Your benevolent bequest needs deeper and nuanced thinking.

(The author is Chairperson, Centre for Investment Education and Learning.)
DISCLAIMER: does not subscribe to the views expressed above. This article appeared in Economic Times dated Jun 12, 2017, 06.30 AM IST

Online Courses

Financial Planning
Basic Level

People are discovering how financial planning can help their money grow and prepare for a more secure futur

Financial Planning
Advance Level

Learn how to measure investment performance through analysing Returns on Investment (ROI) through this onli

Financial Planning
Advance Level

Understand the nature of investment risk with our course on measuring investment risk and how to manage it.

Financial Planning
Advance Level

Learn to construct portfolios and the techniques used to allocate assets across classes and manage risk.

Financial Planning
Intermediate Level

Learn to invest based on investment goals and objectives through our Intermediate course on Mutual funds.