How to leave a legacy that lasts…and lasts…and lasts…
Baby boomers in the United States are expected to hand down more than US$ 30 trillion in the next few years. This is widely being referred to as the greatest wealth transfer in history and rightly so. But what is inter-generational wealth, really, and where did it start?
Well, that depends on where you are and who you ask. Typically, a wealthy family doesn’t come out of nowhere. It starts with one generation that works through hardships and difficult conditions to earn a living and push the next generation forward. The second generation may have sufficient access to education to complete their schooling career and move to better jobs than their parents. The third generation completes their tertiary education and moves on to high-earning jobs in management positions. So, historically, the legacy left by parents has been that of education.
“However, South Africa has now matured to the point where the third generation has either created high net worth (HNW) families, preparing to pass down wealth to the fourth and fifth generations; or the third generation has accessed tertiary education and moved to a position of wealth creation for future generations and while this wealth will certainly include education, it also encompasses property, valued assets and significant wealth typically handled via instruments such as testamentary trust funds,” says Linda Sherlock, Executive Head: Wealth and Business Development at PPS.
What are the concerns around inter-generational wealth?
The Standard Bank 2020 research of HNW individuals confirms that leaving an inheritance to family is a priority, and concerns include:
- Choosing appropriate heirs
- Loss due to inheritance tax
- That children won’t be “ready” to receive the inheritance because they are not financially savvy/responsible
Sherlock explains that at PPS, the term “inter-generational wealth transfer” refers to the process of creating, managing, and preserving your wealth for your beneficiaries to assist them with support towards their desired lifestyle.
When you are in the process of creating wealth, you need to start planning ahead to ensure that you are able to transfer wealth and leave the legacy that will help to create the bedrock from which future generations can build. Sherlock suggests you start by:
Ensuring your heirs are emotionally ready and financially mature by the time they reach the age at which they will access their inheritance. Educating your children from an early age about money will help them to make much smarter money choices and will go a long way towards making sure that wealth is preserved from one generation to the next. Financial education can be achieved by having the right conversations at the right time. Don’t let money be a topic you shy away from.
Leading by example. Do your children know what’s important to you, why you’re working so hard or what your purpose is? If not, you won’t be able to pay it forward. “According to the Williams Group family wealth consultancy, 70% of wealthy families lost their wealth by the second generation and 90% had lost it by the third generation. This does not have to be the case. Get your children and heirs involved in what you do and include them in your decision-making process so that they learn how to make wise decisions when managing their own money.
Protecting your wealth
You’ve spent a lifetime building a financial legacy for your family. Protecting your wealth means you also have to take into account the taxes that fall due on your death. The last thing you want is for your assets to be sold to cover costs such as estate duty. Make sure you have sufficient risk cover to settle any outstanding debts and that you have liquidity in your estate to cover your “death taxes”.
“At this stage, you want to consider how to protect your wealth to ensure sustainability for your beneficiaries and future generations. Ideally, you should be talking to a trusted wealth manager who can help guide you in terms of the investment vehicles and strategies that would be suitable,” Sherlock says. These are some key tips she suggests:
Reduce your tax: structure your estate in such a way that your estate is liable for the least amount of tax.
Use a testamentary trust: The most common way to do this is to create a trust, as a trust cannot pass away. This means the assets do not form part of your estate, which has the net effect of decreasing the value of your estate for estate duty purposes. “This is a great tool, especially for clients with dutiable estates larger than R30 million. The beneficiaries can be nominated in the trust and trustees can be appointed to manage the assets properly and to ensure that the beneficiaries are taken care of,” Sherlock says. She adds that the trustees can act as mentors. You can use the trust deed to dictate the age at which a beneficiary can receive their inheritance from the trust. “This will ensure that the inheritance is paid to your beneficiary when they are “ready” to manage the funds/assets properly. You can even make it a condition in the trust deed that the beneficiaries will only receive their inheritance once they have obtained tertiary education,” she says.
Preserving your wealth
You might choose to preserve your wealth via a company. Sherlock says this will ensure that the wealth is easily transferable. It is also tax efficient, in that, on your death, the shareholding can simply be transferred. The shareholder’s interest will, however, form part of your estate, attracting estate duty and capital gains tax (CGT).
Ideally, you want to know that your beneficiaries are going to be able to manage the wealth they inherit long after you have passed on. While you can start during your lifetime by arming them with financial literacy education and structuring your estate in a particular way, there is no guarantee that they won’t simply spend wildly when they do inherit.
“The key here is good financial advice from a trusted wealth manager who can assist your family with preserving your wealth after you have passed away. Introduce your beneficiaries to your wealth manager during your lifetime so that it becomes a relationship between the wealth manager and your family rather than ‘your wealth manager’,” Sherlock advises.