Passing The Baton: Preserving Family Wealth

Family Wealth

Despite a volatile economic environment, wealth continues to grow in South Africa, with total private wealth increasing from $670-billion in 2016 to $722-billion in 2017. The New World Wealth’s 2018 South African Wealth Report shows that high net worth individual (HNWI) wealth accounts for 42% of this. Given that 34% of SA’s HNWIs are over 60, a massive intergenerational wealth transfer should happen sometime in the not-too-distant future. The question is, how much of each family’s fortune will be lost by the second generation? Research says at least 70% of it, if families don’t start talking to each other.

recent UK study conducted by Sanlam Private Wealth shows this issue is by no means isolated to SA. In fact, of the 64% of wealthy UK 25-45 year olds who stand to inherit a total of £1.2-trillion in the next 30 years, an astonishing four-in-ten haven’t spoken to the person gifting their inheritance about their plans. And close to a third said they’re putting off investing today, because of the money they’re due to receive in the future. Clearly the topic of money is an awkward one for wealthy families around the world.

According to Marteen Michau, Head of Fiduciary and Tax at Sanlam Private Wealth, failure to discuss family wealth succession can have negative consequences for beneficiaries. This can include over-reliance on the money they think they will receive and mismanagement of an inheritance once it is actually in their own hands. “Parents are not helping children prepare for their inheritance nor manage it properly once received, and this can have disastrous consequences that are often counter-productive to the parents’ original intention,” she says.

So how do families start talking about wealth? Michau suggests the following:

  1. Consider developing a family charter as a financial roadmap for not only the family but for those who assist them to look after their wealth. This should include the family’s traditions and values, the family’s story, their attitude to money, and how it should be saved or spent. Even a one-pager is fine, however, the whole family should be involved in drafting the charter and it should be ideally reviewed and revised annually.
  2. It’s vital that the family shares the charter with wealth managers, portfolio managers, lawyers, accountants, and fiduciary and tax experts in their team of advisers. They could even be part of the conversation, to provide guidance and mediation if required, and can measure the structures the family has in place against the charter to ensure these interests are being served over the long term.
  3. It’s important the whole family is involved, including the wealth creator’s partner. Often wealth creation isn’t possible without the support a partner provides. Each family member’s strengths should be explored. For example, Generation Y has been shown to be very passionate about charitable causes, so a millennial family member may want to pursue different avenues for impact investing or advocate specific charities for the family to support.
  4. Warren Buffet said rule number one is ‘look after money’. And rule number two is ‘don’t forget rule number one’. In order to do so, children need to be taught how to confidently handle their inheritance and how to invest it. This usually requires external coaching as schools don’t delve deeply enough into money management.
  5. Children often have no interest in taking over the family business, so parents need to make peace with this. It is important that children and parents can have a candid discussion about what the kids want for their lives. Then parents can see how best to help their children achieve their own dreams.
  6. Regarding structures and tax efficiency, simplicity works the best. In terms of trusts, remember it’s the second and third generations who usually reap the rewards. It can be ‘painful’ to set up a trust initially in terms of tax but there can be many advantages thereafter.

Michau concludes that the process of transferring wealth between generations can be fraught with complexities, with many variables that need to be taken into account. “It’s therefore always advisable to work with a fiduciary and tax expert who can look at all the options, and who can facilitate family indabas to discuss the ‘nuts and bolts’ of securing your family legacy.”