Family affairs: The value of generational wealth planning

Wealth is seldom created and intended for one generation but rather for subsequent generations to appreciate and benefit from. Key to the preservation and protection of wealth for the next generation is estate planning which, from our experience, can be more effective if those set to benefit from the accumulated wealth are involved in the process.

The rise in complex family structures, increased legal recognition for the rights of unmarried couples particularly when it comes to succession, and the growth in global families has added a layer of complexity when it comes to estate planning. More complex family structures spread across different international jurisdictions also often results in multifaceted family dynamics and sensitivities that need to be catered for in the estate plan. Including those generations who stand to benefit from the estate in the estate planning process can result in a smoother transference process and more equitable outcomes for all. Generational wealth planning can also provide subsequent generations with deeper insight into how the wealth was created, the sacrifices that were made, and the intentions of the estate planner. It can also help ensure that the next generation understands how the financial legacy has been structured and better equip them to receive the wealth.

The success of generational wealth planning is dependent on honest and transparent communication across generations, while at the same time ensuring that family relations are protected, respected, and nurtured. Such communication can be challenging, particularly where families are separated globally. Specifically, having members of the same family living in various parts of the world can give rise to jurisdictional complexities that can result in delays in estate administration, unintended tax consequences, and additional costs.

While a valid will is key to ensuring that your assets are distributed in accordance with your estate planning intentions, keep in mind that complex family dynamics and multiple heirs can make it difficult to structure a financial legacy that is equitable for everyone involved. Further, the existence of offshore assets may require that you have a foreign will to deal with those assets, although this can add a layer of costs and administrative complexity.

Appointing an executor who has sufficient fiduciary expertise to give effect to your wishes while at the same time being sensitive to your family idiosyncrasies and dynamics is critical. Similarly, careful selection of trustees to ensure that your trust assets are managed according to the mandate is key to the success of your estate plan. Remember, in the event of your death, not only will your trustees have a fiduciary duty to manage the trust assets in the best interests of your beneficiaries, but they will also be the conduit through which your beneficiaries will need to liaise with regard to their trust benefits.

Planning for both mental and physical incapacity is another important reason to engage subsequent generations in the estate planning process, especially if you have adult children living abroad. To a large extent, mental and physical deterioration is a function of the aging process and is something that plays heavily on the minds of adult children who have elderly parents. Putting mechanisms in place to mitigate against the risk of mental and/or physical incapacity is more effective when one’s adult children are involved in the process and are aware of the plans. In the event of physical incapacity, a general power of attorney can be an effective way of ensuring that your adult children or a trusted friend can attend to your affairs if you are physically unable to, although keep in mind that a general power of attorney will fall away should you become mentally incapacitated.

Inter vivos trusts, which are trusts set up during the lifetime of the trust founder, can be useful for protecting assets of those who are mentally incapacitated although this process will involve careful estate planning and can add a layer of costs. Again, the selection of the trustees is critical to ensure that the trustees operate independently and with sufficient checks and balances to ensure that the assets are protected and administered in the best interests of your mentally incapacitated loved one.

From a generational wealth planning perspective, ensuring a financially secure retirement is key to providing your adult children with peace of mind that you will not become a financial burden to them later in life. Not having insight into the retirement funding position of their aged parents is a source of anxiety for many adult children and, in such circumstances, generational planning can play an important role in alleviating such concerns and providing one’s adult children with comfort that your future medical care, assisted living and/or frail care costs have been budgeted for.

When it comes to planning the distribution of your retirement benefits to your heirs and beneficiaries, it is important to keep in mind that funds housed in approved retirement funds do not fall into your estate. Rather, the distribution of these assets in the event of your passing is dealt with as per Section 37C of the Pension Funds Act, making it the role of the fund trustees to distribute the benefits equitably amongst your financial dependents. While you may have nominated beneficiaries on your retirement fund policy, this information will be used as a guide by the fund trustees when determining who is financially dependent on you – wholly or in part – on the date of your death. If you intend that your heirs should benefit from these funds, it may be more appropriate to move these assets into a living annuity structure as this would provide you certainty that your nominated beneficiaries would receive the funds in the event of your death.

If you have a special needs child, ensuring that those assets intended for him or her are protected and managed in his or her best interests even after your passing is a critical part of generational wealth planning. Special trusts, whether testamentary or inter vivos, are both effective and tax-efficient when it comes to protecting the financial future of a special needs child. If you have other adult children, you may want to consider appointing them as trustees to the special trust, together with an independent trustee, to ensure that your special needs child’s assets are optimally managed.

From our experience, many clients have the desire to transfer some of their wealth to their adult children and/or grandchildren during their lifetime, and this is something that a generational wealth planner can assist with – while ensuring that all tax and retirement funding implications of doing so are considered. Choosing to give money to an adult child or assist them financially with the purchase of their first property should form part of the generational wealth planning process, not only because of the donations tax implications but because it may impact on the allotment in your will to the extent that it impacts on the financial legacy of your other heirs.

Generational wealth planning has proved to be an effective mechanism for encouraging cross-generational discourse and ensuring that wealth is transferred appropriately for the benefit of subsequent generations.

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