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The younger generation as estate owners and trustees

By Opinion Time of article published Jun 22, 2021

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ALL ABOUT TRUSTS:

By Phia van der Spuy

When the founding father of Dubai, Sheikh Rashid, was asked about the future of Dubai, he said: “My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel…

South Africa’s National Youth Commission Act of 1996 defines “youth” as people from ages 14 to 35 years. This group constitutes more than a third of the population of South Africa (34.7%).

Millennials (people in their mid-20s through to age 40) in the United States control only 7% of the wealth. At a similar age, the Baby Boomers (now in their late 50s through to age 75) controlled 21% of the wealth. Only 11% of Millennials are found to have a “relatively high level” of financial literacy, whereas 28% were rated “very low”.

The greatest wealth transfer ever, of $30 trillion (R400 trillion) over the next two decades, mainly from the Baby Boomers, who have controlled 50% of the wealth for the past 20 years, passing to the younger generations, will impact the world of wealth management, preservation (and use). Is this generation financially educated and suited to handle such a gigantic wealth transfer?

The words of Sheik Rashid should serve as a warning. Millennials, who are the largest, most educated, highest earning, but poorest group, are characterised by debt-fuelled consumerism and, as a result of job-hopping, have not sufficiently made provision for retirement, as they cash in their retirement savings when moving jobs. The notion of “instant gratification” seems to be embraced by the younger generation. All these factors have a material impact on the preservation, management and disposal of wealth in the future, which will also have an impact on wealth creation and preservation vehicles such as trusts. The fact that the different generations think differently about wealth is clear.

The purpose of the trust

From the above statistics, it appears there may be more reliance in the future on trust funds for the maintenance of trust beneficiaries, compared with the “saving” mentality of the Baby Boomers. This generation in South Africa were, in most instances, the founders of the typical family trust – a conservative generation.

Often in South Africa estate owners were advised that they could not be the founder, a trustee and a beneficiary of a trust, and they often ended up only acting as founder and/or trustee on trusts created by them. This has created an issue in the event of them planning to utilise trust funds in later years for their maintenance.

It is important to remember that one can only benefit from a trust if you are a beneficiary. In the US about 19% of the Baby Boomers are of the view that they do not want their children to inherit. If you are not a beneficiary, the only way you can get money from the trust is if you receive a donation from the trust (if the trust deed allows for that) or if your children (as beneficiaries) receive the money and then give it to you. However, in both instances it will attract donations tax of 20 to 25%. Estate planners should review their trust deeds and ensure that it caters for all intended purposes.

The new-generation trustee

Baby Boomer boards of trustees seem to be more conservative in handling money compared with younger generation trustees, who are typically replacing the exiting trustees. In many instances the founder would be one of the first trustees. They would have worked hard to accumulate the wealth in the trust to protect and preserve it for their families and future generations. Very few distributions would normally have been made out of the trust and instead wealth would have been accumulated and preserved.

Generally speaking, founders want their children to become trustees of the trust at some point – either while they are still alive, or as replacement trustees on their demise. Considering the generation gap, this may cause conflict between trustees in terms of how trust assets should be managed. Younger generations are less willing to invest in traditional investments, such as shares and bonds, preferring higher-risk assets, such as gold and cryptocurrencies. Primary residences, typically occupied by the founder and their wife held by the trust, may be disposed of, and either alternative investments will have to be considered, or the ‘new generation trustee’ may want to spend the proceeds.

Careful consideration should therefore be given to the planning of follow-up trustees in the trust deed to ensure that the founder’s objectives are met as set out in the trust instrument. It is also advisable to include future follow-up family trustees in trust deliberations from a young age for them to appreciate the founder’s sentiment, as well as the trust’s objective.

Multiple bloodlines

It has been found that most trusts are deregistered after being handed down for two to three generations. This typically happens when siblings each want to go their own way after conflict develops among them and the patriarch or matriarch (the founder) is no longer around. With each generation, the pool of beneficiaries gets larger, all with their own objectives, making it increasingly difficult to manage the trust, often leading to conflict and the trust being terminated. The estate planner should be aware of and plan for this – such as making provision in the trust deed for representation on the board of trustees for each of their bloodlines and for the proper creation of sub-trusts for each sibling. With the younger generation’s different outlook, the founder’s generational wealth preservation objective may not be reached.

Youth as estate owners

Several government programmes support new youth-owned businesses, and the number of youth-owned businesses is increasing. It is a known fact that more than 90% of business owners close their doors within five to seven years of opening them, with projected bankruptcies for 2021 at 220 companies per month and 240 companies per month for 2022.

It is important for new business owners to structure their affairs correctly to shield their personal assets from any business failure. A trust may very well be the solution. Given the harsh tax treatment of paid-up assets being moved into a trust, it may be good advice to create a trust before any material wealth is created.

Phia van der Spuy is a Chartered Accountant with a Masters degree in tax and a registered Fiduciary Practitioner of South Africa, a Master Tax Practitioner (SA), a Trust and Estate Practitioner (TEP) and the founder of Trusteeze, the provider of a digital trust solution.

PERSONAL FINANCE

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