6 steps to take when you are managing money for someone else

How does one care for someone else’s money? How to draw the lines and safeguard the wealth? A dear friend has been left with the custody of his 19-year-old nephew after the tragic death of his sister and brother-in-law from covid. He enjoys a good relationship with the boy, but is unsure how to leverage it when it comes to the financial affairs. The boy is studying engineering and is a boarder in another city. While being completely shaken by the sudden loss of his parents, he realises that he must lean on his uncle to manage his affairs. He will return to his studies soon, and hopes that everything will be taken care of. My friend is a worried man. He is financially savvy but not confident about deciding in these circumstances. And he is not sure how to seek help. What are the steps to take?

First, the wealth of the deceased will have to be ascertained and listed. Since the boy is over 18 years of age, he is an independent adult in the eyes of his bank, mutual fund, insurance company, demat service provider, broker and other financial institutions. Since he lives and studies in a different city, he is likely to already have a bank account.

The son will have to make a claim for all the assets of the deceased parents. He will have to provide the death certificates and lodge claims for money that might be lying in PF accounts, and with other financial institutions. He will also claim any insurance proceeds payable on the death of his parents. If he is the nominee, the process is easier and faster. The assets will have to be transmitted to him before any other action can be taken.

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Second, the uncle will have to get a power of attorney (PoA) from his nephew to be able to operate any of the financial accounts after they are transmitted. The nephew should trust the uncle enough to grant such power, so that the accounts can be managed. This arrangement will free the young man from the burden of managing the assets, while placing the responsibility on the uncle.

There are limits to what a PoA holder can do. While he can do routine transactions of drawing money, making investment decisions, signing off paperwork, buying and selling securities, he cannot make nominations or add and modify the account holders. Therefore, he is more a custodian and manager than an owner of the assets. This arrangement is more secure than adding anyone as a joint holder to the assets.

Third, the young man should know what he is inheriting. There is always the worry that someone might be too young to be involved in financial transactions or that money can be misused if such disclosures are made. However, in the interest of transparency and fairness, and the reality that the boy is the sole beneficiary of the assets, he must know what has been left behind.

However, such disclosure must also come with a broad plan of how the assets will be utilised. This will bring a sense of responsibility and long term view about their utilisation. The nephew and uncle can use the services of a third party—a family elder that they both trust, a dear friend and well wisher, or a competent independent financial adviser—to show them the path and make a plan.

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For example, they may decide to keep the house that the son will inherit, and use the rent to fund the living expenses until he finishes studying. They may earmark the insurance proceeds towards his higher education and decide to invest it such that it can offer the necessary funding when needed. They may manage the investments such that it can grow in value over time. These goals and plans need to be discussed and agreed upon.

Fourth, the broad rules of the arrangement should be known and preferably documented. The PoA for example may end when the boy turns 25. The assets may not be liquidated and drawn down, even if the temptation to do so is high. The expenses on maintenance and upkeep of the property will be kept to a minimum. There would be no transactions and favours to known parties with respect to renting of the house or management of investments. There would be no loans made to anyone with the assets that have been inherited. These are indicative not exhaustive.

The problem with a tragic situation like this one is that a large sum of money will be unexpectedly placed in the hands of someone not fully competent to make financial decisions. The money gets leeched off by others who see the lump sum as not being utilised immediately. Such fate has befallen winners of lotteries and quizzes. Relatives begin new businesses, buy and renovate homes and plots, and soon enough the wealth is lost in careless decisions. The inability to say no and the courage to shoo away those that claim others’ money are the problems. Making rules that everyone agrees upon, and making sure a third party supervises these rules are important.

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Fifth, confidentiality is key. Beyond the immediate family others need not know how much the young man is worth by virtue of his inheritance. His sudden wealth is from extremely tragic circumstances and the boy is still on his way towards building competence to be financially independent. Not letting too many people even if they are well wishers to know, meddle and offer advice on the finances of the boy will be helpful. This arrangement rests on the premise that the boy and his uncle are well bonded and trust one another completely. The responsibility for the uncle to act in fiduciary capacity and make bonafide decisions is immense.

Sixth, periodic review and going over the assets and their performance is important. Especially since the uncle himself is financially savvy. Selecting the right financial adviser after thorough due diligence is important. Having done that, being able to review, ask questions, seek clarifications will keep the affairs in control. This situation calls for working with great care and respect for another person’s money. Setting goals and targets, choosing products carefully, monitoring the assets are all important and must be done professionally and with competence and accountability. The young man is the rightful owner of the assets. He may not like being patronised. Making sure that he agrees with the arrangements being made, and trusts the process and people is important. Any behavior that jeopardises the trust, can precipitate things and lead to rash decisions. My friend’s responsibility is immense.

(The author is Chairperson, CIEL)



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