Generational wealth planning is a family affair

Wealth is seldom isolated to a single generation, and most who have amassed wealth have the desire to ensure that their assets are transferred to the next generation smoothly, efficiently and as equitably as possible. The increase in the number of blended, more complex family structures, together with the fact that many families are fractured around the globe, has added a layer of complexity when it comes to estate planning and developing a financial legacy for the next generation. More complex family structures also creates the potential for greater family dynamics and idiosyncrasies that require sensitivity and a carefully considered approach to estate planning.

As a result of the above, we have noticed a marked increase in generational wealth planning, with more and more clients choosing to include their adult children in the estate planning process. Not only does this help in ensuring the effective transference of wealth from one generation to the other, but it also provides the next generation with deeper insight into how the wealth was created, the sacrifices that were made in the process, the intentions behind building the wealth, and the purpose for which the estate planner would like to see the wealth being used. Ensuring that the next generation understands the manner in which the legacy has been structured is as important as ensuring that the next generation is equipped to receive the wealth and protect it into the future.

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 around the world. Further, having members of the same family living in various parts of the world can give rise to jurisdictional issues which, if not attended to by an expert in the field, can give rise to delays in winding up an estate, unintentional tax consequences, and unforeseen costs. Many civil law jurisdictions, such as France, Holland, Germany, Portugal, Spain, as well as Mauritius, have mandatory succession rights, or ‘forced heirship’, laws in place which place restrictions on how your assets can be bequeathed, and if your estate is not appropriately structured taking into account the laws of the jurisdiction in which your assets are located, your estate planning intentions may be inadvertently subverted.

Naturally, a valid and well-drafted Will is key to ensuring that your intended legacy has a voice, although this is often more complicated than it seems. Complex family dynamics and multiple heirs can make it difficult to structure a financial legacy that is deemed equitable for everyone involved. Further, the existence of offshore assets may not only necessitate the drafting of a foreign Will, but may also add an additional layer of costs in respect of seeking expert legal and fiduciary advice in the country where your assets are housed. Appointing an executor who has sufficient expertise to give full effect to your wishes while at the same time being sensitive to family dynamics and relationships is of the utmost importance, and in our experience, it is advisable to appoint an independent fiduciary expert to fulfill this role. Similarly, if you have made provision for a testamentary trust in your Will, you will need to give careful thought when appointing your trustees and setting out their duties and obligations. Once you have passed, not only will the trustees be the conduit through which your beneficiaries will liaise with regard to their inheritance, but they will also be responsible for ensuring that the trust assets are managed in your beneficiaries’ best interest.

Putting plans in place – and communicating them to the next generation – for the management of your financial affairs in the event of incapacity is an essential part of estate planning. As you age, the possibility that you could become mentally or physically incapacitated will naturally play heavily on your adult children’s minds, and providing them with comfort that effective mechanisms have been put in place to deal with such an eventuality is an imperative. In the event of a physical disability, a general power of attorney is an effective way of ensuring that your adult children can take over the management of your financial affairs, although keep in mind that such a mandate will fall away in the event of that you were to become mentally incapacitated. Inter vivos trusts are very effective estate planning tools to ensure that your assets can be managed and protected in the event of mental incapacitation, but using such a vehicle would entail careful forward planning and structuring to ensure that your goals are met. Once again, the appointment of trustees to manage the assets in the trust is something that will require careful consideration and an enormous amount of trust. While a Living Will can prove to be very useful in the event of a medical crisis or emergency, an Advance Healthcare Directive – which includes the appointment of a medical proxy – is an excellent way of providing your loved ones with guidance as to how you would like to be cared for at the end of your life and can prove particularly useful in the face of a terminal diagnosis.

Another key component of generational wealth planning is providing the next generation with assurance that your retirement funding is adequate and that you will not become a financial burden on your adult children later in life. Not having insight into the retirement funding position of aged parents is a source of anxiety for many adult children, and effective generational planning should take steps to provide the next generation with comfort that sufficient and effective retirement funding is in place, including the costs of future medical care, assisted living and frail care, if required. In terms of distributing one’s retirement fund assets, it is important that your estate plan takes into account the nature of each investment and the legislation that governs how the assets may be distributed. Remember, if your funds are housed in an approved retirement fund, the distribution of the funds will be at the discretion of the fund trustees based on their determination of who qualifies as a financial dependent. This could therefore be a determining factor in when you choose to retire from the fund bearing in mind that a living annuity structure allows you to nominate your beneficiaries as you choose.

If you have a special needs child, ensuring that those assets intended for him are protected and managed in his 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.

If you have business interests, your estate plan should also include a workable succession plan in respect of your business shares with due regard to the shareholders’ agreement and business assurance plan. Having sufficient buy and sell assurance in place is not only an excellent way of ensuring that the surviving shareholders can purchase your shares in the event of your death, but also serves to secure the value of your business interests for your loved ones.

Another critical factor to the efficiency in which your estate is administered is the access and availability of key estate planning documentation, and in this regard we normally recommend that you provide your adult children with copies of all relevant documentation, including a copy of your Will, title deeds, birth certificate, ID, passport, marriage certificate, ante-nuptial contract, trust deeds, bank account details, divorce orders, benefit statements, gun licenses and other important documentation. When winding up your affairs, the Master will insist on certified copies of your heirs’ identity documents which means that, if any of your heirs reside overseas, obtaining these copies can result in unnecessary delays and we advise that you keep copies on hand. Important documentation which should also be readily available includes your Living Will, organ donation card and medical aid details.

Generational wealth planning has proved to be a very effective way of opening up communication and discourse across generations, and to ensure that the estate planner’s intentions for the transference of wealth are respected, understood, appreciated and given effect to.

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