Careful management of large windfalls is key to ensuring you can enjoy it to the full, writes Peter Shand
Did it cross anyone’s mind how the family from Monmouth might have spent their weekend following the £61m Euro Millions lottery win that they enjoyed last week? The chances are that it was a far-from- routine weekend in front of the television, as the family members digested their new millionaire status.
It is also likely that once the champagne glasses were cleared away, there were the beginnings of some serious financial matters to attend to. Lottery winners are, automatically, signposted to wealth counsellors who appear on the scene as soon as the bank transfers the prize money. From then on, history reveals that it becomes a lottery in itself as to whether the personal fortune of the winners goes up or down.
In fact, there are a disproportionate number of cases, across the world, where lottery winners have ended up losing everything, including their relationships and, in some cases, their freedom, where some winners have ended up in the fast lane, and on the wrong side of the law. One salutary tale was that of the $5.5m lottery winner in the US who ended up losing so much of the original prize-winnings that he eventually ended up on benefits.
Andrew Cicero (from Milwaukee) made one bad investment after another and got caught up in tax problems, which cost him nearly the whole fortune. He went on to sue his financial advisors who, he claimed, led him into bad investments which plummeted during the burst of the dot.com bubble. Worse still, it also ended up costing him $250,000 in tax penalties and interest when he misjudged his liabilities to the US tax authority. Added to his string of bad luck was a divorce which stripped away the remaining hundreds of thousands. The moral of the story, to coin the cliché, is that money doesn’t always buy you happiness and, in Andrew Cicero’s very own words, “Everybody says, you lucky sonofagun, you won all that money but, you know, it did not work out that way”.
On the other hand, traditional values of careful budgeting and prudent investing have kept a generation of families in Scotland on the straight and narrow, particularly among the generation born during the baby boom. Families from that generation, who have built up healthy balance sheets during their lifetime, including ownership of their own homes, are keen to preserve their assets for future generations. When it comes to attitudes to wealth and spending, there is undoubtedly a culture gap between what is commonly known as “Generation X” and those Baby Boomers.
So where the matter of passing on wealth is concerned, there is naturally some reluctance in the minds’ of parents hoping to discourage their children “getting into the fast lane” and avoid assets disappearing like those of imprudent lottery winners. The good news is that with sound advice, there are means and ways of protecting assets through good planning and careful decisions. Generation X is likely to inherit family assets from its parents and, much like a lottery winner, will need guidance on how not to lose it. So parents need to give thought to how they structure their Wills. Sometimes it will be a case of including some restriction on the timing of when assets are inherited, and it must be said that a slightly more sophisticated Will can provide reassurances, which an off-the- shelf Will does not. Legal arrangements can also be put in place to guard against the erosion of assets from irresponsible beneficiaries, or even the risk of divorce, separation or bankruptcy of heirs to an estate. There is a tradition of using a family trust in Scotland to achieve this.
Not forgetting those with valuable private pensions, there are now greater freedoms on who can inherit those assets too. So much so that a pension fund, itself, might come as something of a windfall for a family member that might inherit it following the death of the parent or grandparent. Another reason, then, to seek advice on the best way of passing on wealth, without the risk of it being wasted by the future recipients. The proverb that “the first generation makes it, the second generation spends it, and the third generation blows it”, is not always true. However, it takes a bit of planning to avoid falling into the trap. So, once the holiday has been enjoyed and the car has been purchased, perhaps there will be room for the next generation to learn from the lessons of life’s lottery mishaps.
• Peter Shand is a partner with Edinburgh solicitors, Murray Beith Murray