Money & Power
How Parents Can Prepare Their Heirs And Keep the Money in the Family
When it’s time to transfer the family wealth, parents must make sure the next generations can take care of it.
IMAGE COLLAGE Yzabella Cruz
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It was the North African philosopher, Ibn Khaldun, who first made the now commonplace observation that the first generation founds the ruling house, the second generation makes it powerful and the third loses it all. So he said.

Through the years, there have been varying versions of the same theme. So now, you hear old people sigh and say that it is the first generation that establishes the family fortune, the second generation that makes it big, and the third that squanders it all away.

My father was trained in old-style banking, where people are actually lent money to start and grow real businesses rather than to use it for pure speculation. He rose from the ranks and certainly worked hard to become “the bankers’ banker” he was regarded by the industry. Perhaps, too, certain circumstances in his life helped shape his values and attitude towards money. For instance, he was just two years old when he lost his father. He was raised by a mother who had a sharp nose for business and a thing for hard work. She made sure none of her kids would ever have an idle moment.

My father made all of us, his kids, work summers after graduating from grade school. Like everyone else, we had vacations—but only from school. Summers found us waking up early and dressing for work every day while our classmates went out to play.

In those days, the expression “child abuse” went by the name of discipline. And children never thought of questioning the discipline imposed on them by their parents. They might grumble under their breath but children never questioned their parents’ discipline, obeying what they’re told to do. This was true in our case, and every summer of my high school and college years, I went to work. Once, I was in New Accounts Department, in charge of stamping checkbooks. Another time, I was in the Personnel Department.

Aside from sheer obedience, what kept us children at our jobs was the fact that my mother stopped our allowance. We had to rely on what our summer jobs paid us. My parents had one thing in mind. It was not to rob us of our childhood. Rather, they wanted to teach us the value of money. This was the Golden Rule in our family. And we didn’t consider ourselves rich. We never wanted for anything. Our parents took us abroad where we lived in a hotel for as long as a month, but we never stayed in a suite; we only had connecting rooms. We always thought rich referred to other people. And we wondered if the same frugality was taught the kids by such people.

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Frankly, I know how to earn money but I don’t know how large fortunes are made other than inheriting it. And I don’t know if rags-to-riches stories are really true without some uncle in the background giving some propulsion. But I think I have observed some things by which fortunes are kept and not lost.

I encourage my kids to put aside a third of their income as soon as they gain some.

The publication, U.S. Banker reports on its website that at least $12 to $18 billion worth of wealth is passed on by parents to children in the next generation. These figures pertain to the United States, but since some of our own billionaires have made it to Forbes Magazine’s list of the world’s richest, it can be assumed that affluent families here are not far behind in bequeathing to their heirs the same, if not close to the kind of big bucks mentioned.

Citibank’s Judith Go says, “It’s crucial for families to ensure that their hard-earned wealth is not squandered away by future generations.” So how to train children to be careful with money while having so much of it around?

The first rule is never to give them that much money. And this rule applies even to those who have been sent to study abroad. The dean at Bryn Mawr College in Pennsylvania told me that many parents of foreign students think that by giving their children a big allowance, their loneliness will be assuaged. Most untrue.

What happens is that your child will go on a spending spree, to shop for clothes or buy companionship by being the fool who always picks up the tab. Whatever good feeling your child gets from resorting to such activities is temporary. They will fall back into feeling homesick again. To this dean and my daughter’s dismay, $150 a week was considered a big allowance.

Children should learn to live within a budget, a budget sufficient for their needs. For sure, it won’t be enough for their wants, but that is another thing altogether. And for what they feel they just need to have—an iPhone or a Gucci tote—they will simply have to work for the money to buy those.

The ATM card has vastly simplified life. But if you have no self-control and no sense of budgeting, an ATM card that spits out money can be the worst thing. Before they know it, they no longer have enough to maintain the minimum deposit requirement.

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The second rule is never to answer for your children’s financial deficits. Once your children have gone overboard with their ATM, or worse, maxed out on their credit cards, do not volunteer to pay. Make the erring child propose a payment scheme. Help only after they have tried to solve their problem. But make sure you are paid back even if it will take years of monthly deductions from the child’s allowance.

After you have saved enough—or inherited a lot—have a good investment plan. 

Compounding the shopaholic’s plight, credit card companies have invented the “paylite” scheme. You can buy a P100,000 hi-tech massage chair by paying only P9,000 pesos a month, no interest. Can you spend P9,000 a month for the next 12 months? Even if you do, can you really spare the amount? If the answer is “maybe,” you have no business getting it. Go emphasizes the importance of living within your means. “Just because you can afford something does not mean you have to have it.”

Ben Franklin, who wrote Poor Richard’s Almanac said this about money: beware of little expenses; a small leak will sink a great ship.

My father told us never to buy anything that depreciates on amortization because, he said, “you don’t have the money in your pocket and you are already spending it.” And because that car (or, these days, that smartphone) will not have the same monetary value a month from now. A good money manager will advise you to purchase assets that appreciate and provide income.

Real estate is a different story. You and you alone should check the reputation and credit of the developer. Don’t rely on brochures; don’t be swayed by the advertisement that you can have luxury by paying only P2,000 a month for 60 months. Chances are you will have the luxury of stepping into a closet-sized apartment.

The third rule is to teach your children to save. Remember how our grandmothers always opened savings accounts for all the apos and religiously deposited a fixed amount every birthday? I encourage my kids to put aside a third of their income as soon as they gain some. What you don’t hold in your hand, you can’t spend. One of them has heeded me on the matter while the other is still absorbing the advice.

For us fortunate few with parents who worked and saved so hard to be able to gift us with the good life, the only way we can show our appreciation is to be as prudent with the money they left us as they were in making it.

The fourth rule is, after you have saved enough—or inherited a lot—have a good investment plan. According to experienced managers like those with the Citigold Wealth Management group, assets should be allocated according to a person’s goals, time horizon, and tolerance for risk. Remember that most get-rich-quick schemes are very high risk and can become, even more quickly, lose-it-all schemes.

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Time and again we read about investment scams, pyramid schemes, and the great number of people who still fall for them. But gullibility is not a uniquely Filipino trait and these schemes all started and still flourish abroad. Everybody believes that it can happen to someone else but not to him. Well, you can be that somebody else’s someone else.

I advised my stepdaughter, who is generous and always helpful, that the last people she should buy anything from or put her money with are friends and relatives. First of all, it is hard to say no, and when you do say no, they get mad at you. Invest with professionals, and only those connected with reputable firms. Don’t be gulled by foreign degrees; these only show how sharp he is, and not all the time an indication of how honest he is. Forget the best friend or the daughter of Tita Sosyal, who has never held down a steady job and is now doing foreign currency trading. You cannot stay nice when they can’t return your money, let alone the profit they promised.

Although there is no substitute for hard work, some of us may be luckier than our parents since we do not have to start at the bottom with an empty pocket. For us fortunate few with parents who worked and saved so hard to be able to gift us with the good life, the only way we can show our appreciation is to be as prudent with the money they left us as they were in making it. In this regard, I am reminded of a story told about the founder of the Oberoi hotel chain who built a small house on the same grounds where his son’s huge mansion is. Asked why his house was so modest, he answered, “I didn’t have a rich father.” 

 

SET THE STAGE
These steps will ensure the family wealth is protected:

Protect your assets. Life insurance can help protect the wealth you have built over your lifetime. It can also shelter your heirs from estate taxes and provide income replacements for your loved ones.

Manage funds well. Borrow money to purchase assets that appreciate or provide income, but not to splurge on things you don’t need. Make a financial plan. Handle windfalls well by putting away a good amount of investment.

Plan for your future. Save for retirement. Plan your retirement spending. Plan your estate so your taxes won’t be so high.

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Prepare your heirs. We all know we can’t take it with us. Help your heirs to be adequately prepared to take over one day and handle the family wealth responsibly.

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Louie B. Locsin
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