Transferring wealth between generations

Avoid the ‘wealth trap’

It may surprise you to hear that despite access to significant resources, one of the most common financial missteps by wealthy and high-net-worth individuals and families is to delay discussions about succession planning. Avoid this ‘wealth trap’ by starting these conversations sooner rather than later. Put your succession plan in place and then you can revisit and adapt it over time to make sure it always meets your needs and objectives.

‘Succession planning’ in the corporate sense is about setting out succession paths and follow-up plans for senior executives’ job roles. ‘Succession planning’ in the financial sense, is a holistic solution that can structure every aspect of assets and estates, minimise taxes and create a lasting legacy across many generations. It also has value beyond that because it can maintain family harmony by helping to avoid drama and conflict, and it can also make life better for others through philanthropy and supporting charitable causes.

While succession planning is widely used by wealthy and high-net-worth individuals and families, it is also worth doing even if you are just starting out on your wealth-building journey because it is never too early to think about your legacy.

What to consider

Understanding the main reasons why wealth does not make it from one generation to the next, is a great place to start your succession planning. The answer is simple: a lack of strategic thinking. That’s why the best succession plans are tailored to take every set of unique circumstances, needs and objectives into account. Because no two individuals and no two families are alike!

Your succession plan should structure every aspect of your assets and estate by making use of different financial and fiduciary vehicles. The tools at your disposal include a well-drafted last will and testament, an offshore or international will if you have assets outside the country, trusts, companies, gifting and tax mitigation.

Ken Newport, National Manger of Succession Planning at Capital Legacy, adds, ‘Aspects to consider when thinking about your succession plan, include business interests, trust provisions and objectives, succeeding trustees, outstanding loan accounts, and the separation of entities and their respective assets.’

Your estate plan sits within your succession plan, so wills and trusts are two of the most effective legal structures for transferring wealth and assets, and you should also remember strategic gifting and charitable contributions or philanthropy.

‘The most important point is not to leave your succession planning until it’s too late, the earlier you start the better. Once you have all the structures and vehicles of your succession plan in place, you must review them at least once a year. This will ensure that you are complying with the latest legislation, while maximising the tax- and risk-mitigation strategies available to you, empowering you to preserve as much of your legacy as possible,’ adds Newport.

Consulting a professional succession-planning expert is the best way to ensure that everything is done legally and correctly, and that there will be a seamless transition when you pass away.

Trust(s) in the future

Trusts can be highly instrumental in future-proofing your succession plan, provided they are structured and run correctly. A trust is a separate entity that does not cease to exist when you pass away and therefore estate duty (also known as inheritance tax) is not triggered.

Trusts can enable generational wealth to grow by transferring it not only from one generation to the next, but across many generations, making a legacy more impactful by extending it across multiple generations.

Get professional advice to make sure your trust(s) are correctly set up and sufficiently future-proofed by making provision for succeeding trustees, who must take responsibility after the person who originally set up the trust passes away.

Tax tactics

The two major tax considerations in succession planning are estate duty and capital gains tax because they could significantly erode what you leave behind. Capital gains tax applies when you pass away because you are considered to have disposed of your assets when you die.

• In South Africa, estate duty is levied at 20% on estates up to R30 million, and at 25% over R30 million. If you have assets in other countries or jurisdictions your beneficiaries could be further liable for inheritance tax, but our country has double-taxation agreements with many other jurisdictions. Where this applies, a person may not be liable for estate duty in South Africa if inheritance tax abroad is paid.
• Capital gains tax is calculated by deducting the base cost of your assets from their market value. The base cost is the acquisition cost of the asset, plus improvements or enhancements to it. The difference between the base cost and market value is the net capital gain and that is taxed at an effective rate of between 7.2% and 18%.

Every estate and its assets and investments are unique. However, Newport reiterates that not procrastinating when it comes to your succession planning and seeking professional advice to ensure correct structuring are essential. This also applies when acquiring new assets to ensure that you use the correct structures to hold and own your new acquisitions.

Paying it forward

While succession planning can make sure that there is an efficient transfer of wealth from one generation to the next, and beyond, it can also be highly impactful in giving expression to a family’s values through philanthropy, and by supporting individual family members’ favourite charitable causes.

This is becoming more prevalent with worldwide shifts in how wealth is used among younger generations – no longer predominantly for personal gain, but increasingly in support of causes that look after people, animals or our natural environment. Many young consumers see themselves as more values-driven than previous generations and look for opportunities to use wealth for the sake of positive change.

It is worthwhile having open and frank discussions about attitudes to wealth as part of your succession planning because younger outlooks on how to use wealth can understandably cause alarm among older family members who don’t want to see their hard-earned assets squandered. Newport advises, ‘By including philanthropy in your thinking and consulting with professional experts who can advise on putting the necessary safeguards in place, it is possible to strike the right balance between older generations’ (often more cautious) approaches, and what younger family members would like to prioritise and pursue.’ 

Keeping an open mind to younger generations’ thinking and being receptive to what they would like to achieve, could ensure that you make proper provision for their needs to be met, while also helping to avoid conflict and leaving family harmony as part of your legacy.