Many of us are happy to be able to save enough money to pay for our retirement and leave something to our children when they venture out into the big world. But a growing number of those who have more financial freedom want their money to last beyond one generation.
Preserving wealth becomes increasingly difficult as it shifts through generations and as much as 90% of affluent families lose their wealth by the third generation. The main reasons for this says Anton Schoeman, General Manager: Carrick, are lack of forward planning, not equipping future generations for stewardship, family dynamics or disputes, and no clear integrated investment and succession plan. In addition to that, you still need to consider tax and inflation implications and natural reduction of assets.
Keep in mind there is a difference between estate planning and legacy planning. “Estate planning refers to the technical aspect of taxes, liquidity, costs and structures to ensure optimal advantage is being achieved with the assets you own,” explains Schoeman, “while legacy planning refers to your wishes, intentions and desires of what you want future generations to continue with and refers to purpose.”
If you’re serious about succession and inter-generational wealth transition, you need to start implementing measures now to ensure your grandchildren also reap the benefits of your hard work. It’s no longer a case of simply drawing up a will and expecting everything to slot into place. To ensure a smooth transition, families need to take into account a number of moving parts.
1. Family constitution
“One of the biggest threats to inter-generational wealth is a lack of communication and process reference framework on how to deal with conflict or make decisions that impact the family wealth,” says Schoeman. “Most wealthy families assume that investment markets or economic conditions are the greatest threat to the preservation of their wealth, but most often the threat to generational wealth is poor communication and family dynamics.”
Many families adopt a family constitution to manage this. This is a robust governance framework or non-binding document to manage the wealth transfer, instil values, determine who runs the family business, create consensus on investment strategy and philanthropic vision and in doing so, limit conflict. It’s best to appoint a key advisor who can manage the process without emotional influences. If there are business interests involved, without strong governance business continuity can suffer and cause disruption.
2. Education / empowerment
Too often, family wealth is eroded due to a lack of trust, transparency and communication between senior family members and their heirs. “Many of us have been taught not to talk about money even within our own family. But this lack of communication with the next generation and further education around the family assets and purpose of wealth, leads to a lack of knowledge on how to manage this once the previous generation hands over or is gone,” says Schoeman. “Generally, the first generation works hard to build their wealth over time, with the second and third generation not always appreciating the sacrifices and understanding the effort it entailed. The fact that wealth is not accumulated overnight and that it needs to be preserved are key principles to be shared.”
3. Diversified investment management and financial planning
There needs to be a coherent strategy taking all the moving parts into consideration to be able to optimise returns and minimize risk, and the holistic plan and portfolio solutions are interlinked to provide ongoing financial planning across multiple generations. “Creating sustainable generational wealth is both science and art. Two parts of the equation are communication with family members and comprehensive investment strategies,” explains Schoeman. “The protection and preservation of wealth requires a multi–disciplinary approach and appropriate strategies to address a variety of potential risks and needs.”
4. Optimal structuring
Expert planning and legal advice are essential for tax-efficient wealth structuring, particularly if you own businesses or foreign assets. Inheritance tax is a tax payable by a person who inherits assets, for instance, money or property, from a person who has died. South Africa’s inheritance laws apply to every person who owns assets both locally and internationally. A tax specialist can assist with reliefs and exemptions and maximise the inheritance you pass on to the next generation.
5. Continuity planning and agreement
“If you fail to plan, you are planning to fail,” said Benjamin Franklin. In order to mitigate risks, consider developing a continuity plan to ensure a clear mandate in terms of decision-making responsibilities and that the right people to take up the roles to support the business. There are certain measures that should be put in place, including drafting a will that takes into account the tax regimes and legislation where assets reside; establishing a trust and appointing an impartial trustee; and employing a financial planning professional to guide you on your wealth management and investing in your family’s future.
Protecting your legacy
“Investors of all ages are becoming more conscious of the impact that they can make on their world, both socially and financially,” says Schoeman. “Investors want to make sure that their investments reflect their values as members of society and as business owners, rather than just the realisation of their financial goals. And we must acknowledge the importance of outcomes and goal-based investing. Investors are increasingly concerned with ensuring their families’ financial security, and less concerned with outperforming the market or achieving higher returns on their investments.” By educating and involving the next generation, implementing a robust governance framework and sound financial planning, family businesses can successfully create wealth across multiple generations.