The Lotto effect

01 October 2009 FAnews

There are many stories about people who have won big jackpots or lotto payouts, only to find themselves in a precarious financial position a few short years after their major windfall.

The way to sustainable financial security and wealth is through meticulous planning and being financially prepared – based on a thorough understanding of how to deal with money and assets. If this has been achieved, a jackpot or lotto payout becomes a true windfall and not a painful lesson in how not to manage money.

Many people do tread the path on the way to financial freedom and security, and yet fail to consider what lies in store for their spouses or dependents when they pass on. They merrily leave all their wealth and the proceeds of policies to their spouses or dependents, without considering whether they are capable or astute enough to look after and increase their new-found wealth. This is tantamount to actually ensuring that spouses or children, even minor children, are placed at risk of the dreaded lotto effect, receiving a whopping jackpot in the form of an inheritance or policy payout, without a clue how to manage it.

Squandering an inheritance

If the proceeds of a life policy are paid out directly to a spouse or child, who is financially impaired, there is a high probability that they will end up squandering the inheritance or the proceeds of a policy, and possibly end up destitute. Beneficiaries very often are the direct cause of their own misfortune. All of the deceased's efforts in saving and implementing sound financial planning to ensure loved ones are provided for, come to naught.

But this is not the only cause for concern. A surviving spouse could be held responsible for debts relating to a business, vehicles, taxes and more. The proceeds of a life policy could then easily be attached by a creditor of the surviving spouse. A child or beneficiary could be in the same position.

Growing an inheritance

Even if spouses or children invest the proceeds of a policy or any other assets bequeathed to them and multiply their inheritance, this wealth could still be subject to a claim by their creditors in the future. It will most certainly be taxed on the event of their deaths and will be exposed estate duties and executors fees.

All-round protection

The only solution to the above scenarios is to establish a trust. This trust must own the assets to be made available to beneficiaries, and must be both the owner and beneficiary of any life policies.

This will ensure that the proceeds of the life policies can never be attached by a creditor of the deceased estate, and the proceeds will also be protected from creditors of the surviving spouse or children. The proceeds will in fact also be protected from the intended beneficiaries, since the lotto effect has been nullified. The proceeds will be available to the spouse and or children in a prudent and managed way, thus protecting them from themselves.

Placing assets in a trust will further ensure that the assets and policy proceeds will not be subject to capital gains taxes, estate duty or executor's fees in the hands of the spouse or dependents on the event of their deaths.

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