Transferring generational wealth - the options and decisions

28 August 2019 Elbe Thatcher, Fiduciary Specialist at Old Mutual Wealth

At some stage of every investor’s successful financial journey, the question of transferring wealth arises. This simply means the transfer of wealth to your heirs or beneficiaries on your death by utilising different financial strategies such as, amongst others, wills, estate planning and/or trusts in a tax-efficient way. As the testator, one of the biggest challenges and obstacles you will face when drafting your will is firstly, deciding who to transfer your wealth to and secondly what is the best way to transfer it. The first decision is very personal, and each individual will have a different situation. Most people tend to bequeath their wealth to a spouse, children or grandchildren, but it is the testator’s prerogative to decide who will benefit from their will. The second decision is one best made in consultation with a trusted adviser.

Options and decisions
When it comes to transferring wealth, there are many different means at your disposal. Among others, you can:
• Donate wealth over time to heirs in a tax-efficient way.
• Make a direct bequest in your will - a simple and effective method if you are satisfied that your heir/s have sufficient financial knowledge and will not squander the inheritance but manage it wisely.
• Bequeath the benefit to a trust for the benefit of the heir(s)/beneficiary(ies): the trustees act as gatekeepers, administering the funds on behalf of the beneficiary/ies and giving you peace of mind that your heir(s) will not be in a position to squander the inheritance.
• Adopt a combined approach – donate a small amount directly to the heir and place the balance in trust for their benefit.
• Bequeath the inheritance to an “incentive” trust: the trustees will reward the beneficiaries with income/capital distributions provided they comply with certain incentives as stipulated by you, the testator, such as getting a university degree, securing full-time employment, meeting savings goals, etc.

Perhaps the most important consideration in deciding which option to choose is whether your heirs have the financial wisdom to manage their inheritance. Do they have the skills to draw up a monthly budget and stay within the budget? Will they maintain an emergency fund, save money every month and avoid overspending? Will they engage with a skilled adviser to make investment decisions? The way you transfer your wealth will depend on the answers to all of these questions. If you and your trusted adviser delve thoroughly into the personalities and financial knowledge of each heir and decide on the best way to get the inheritance to them, you will have the security that your wealth will be safeguarded in their best interests.

To help you make the right decisions, it can be useful to involve your heirs in the conversation. To share a personal example: I have two sons, the eldest being financially savvy and the other less so. I asked them both whether they would prefer me to put some money in a trust or bequeath the money directly to them. The eldest thought he might want to go overseas, so I said I would draft the will so he could choose to put it in trust if he wanted to. The youngest opted for 30% in cash and the rest in a trust because he didn’t believe that he was sufficiently financially competent to manage it on his own. Should circumstances change in future a simple amendment to the testator’s will is all that is needed to change the bequest. If you prefer not to include your heirs in the discussion, talk to your trusted adviser about what will give you peace of mind and protect your beneficiaries.

Incentive trusts
Some people find it tempting to make use of an incentive trust. This is often done with the best intentions e.g. in the hope that the conditions stipulated will compel a financially irresponsible heir to mend his/her ways. However, this begs the question: If you could not teach your children financial wisdom during your lifetime, how can you expect the trustees to enforce it when you’re no longer around? Ironically, one of the reasons that the next generation is lacking in financial skills is because the first generation spent so much time generating and expanding their wealth that they neglected to put in the time and effort required to embed the necessary principles in their heirs. I believe that it is better to teach children the right financial behaviour when they are young, rather than to try and fix things after you’re gone.

Once you have decided what you want to do, it’s important to discuss the types of assets you wish to transfer and the relative practicalities. Is it a fixed asset? Does it have to be sold? Is it possible to transfer it? Do you want to transfer a fixed property in two persons’ names, or can you do an alternative investment? Go through your options with your trusted adviser and make sure you understand the implications in order to make an informed decision. If the wealth you wish to transfer is tied up in a family business, you will need to go into succession planning. It’s imperative to consider who the successor will be and how to prepare them for taking over. If you intend making your children the heirs of your business, involve them now so that when you aren’t there anymore, they can seamlessly take over the running of the business.

Estate planning and tax burden
Proper estate planning is crucial to prevent a major tax burden in the form of unnecessary estate duty, capital gains tax and sometimes VAT. If you do not draft your will correctly, you might incur capital gains tax that could have been avoided by structuring your will differently or bequeathing your assets in a different way. This can have a huge impact on the wealth available to distribute to heirs. This is a specialist matter that may require the assistance of a legal adviser or fiduciary specialist.

Transfer of trust
Whether you have a 5-, 10- or 15-year financial plan, when meeting with your trusted adviser, invite your heirs to sit in and discover what you want to achieve and how you are going about it. If you would prefer that your heirs continue the relationship with your trusted adviser, it would be wise to establish and nurture the relationship between the heirs and your trusted adviser while you are still alive. Not only will this boost their financial literacy, but it will also help establish a relationship between them and the adviser, ultimately leading to a seamless transition. Once again, it’s about looking after your heirs’ best interests. Remember that as soon as they inherit, they will be inundated with proposals from other institutions and advisers. If they do not have the same relationship of trust with your trusted adviser, it is likely that the heirs’ will take the wealth and move it to another provider or adviser.

To ensure your wealth is safeguarded and not squandered by the next generation, the bottom line is that you need to make sure that you have an up to date will detailing exactly who and how your heirs should inherit. Rather spend the time while you are alive to teach your heirs financial principles and guide them. A trusted adviser can be of invaluable assistance in this regard.


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