Over the past three decades the role of professional planner has developed to the extent that he now fulfills the roles of mentor, guide, co-strategist and trusted advisor to the client and the client’s extended family. More and more clients are actively choosing to involve their adult children, and sometimes even their grandchildren, in the financial planning process – giving rise to a new and exciting discipline of multi-generational financial planning. What exactly does multi-generational financial planning entail?
Multi-generational living, where three or more generations reside on the same property, is on the rise in South Africa for a number of socio-economic reasons. With increasing costs of living, the high cost of tertiary education and concerns around crime and safety, many families are choosing to have their elderly parents live with them. Many retired clients are choosing to build granny flats on their adult children’s property in order to reduce post-retirement living expenses and assist with childcare. Traffic congestion and inadequate public transport means that working adults with young children are time-strapped and often find it difficult to get home in time for the meal, homework and bath routine. Having grandparents on the property can provide a fantastic solution for cost-sharing, care-sharing and care-giving. The decision to set up an extended family living arrangement naturally pre-empts financial discussions between generations around property ownership, setup costs and living expenses, and opens up much-needed channels of communication between the generations.
Post-retirement living, care and safety
A lack of adequate retirement facilities and the prohibitive costs of retirement homes have resulted in many retirees being forced to explore alternatives for their post-retirement living other than what they had planned for. For many retirees, assisted living, frail care and private nursing services are simply unaffordable. In addition, many retirees begin to feel more vulnerable to crime as they age and security becomes a real issue. Added to this, increased longevity and advances in medical science means that many retirees are out-living the life expectancies planned for, even with chronic or terminal illnesses. The costs and vulnerabilities faced by retirees often require the intervention of their adult children in terms of financial assistance, care and emotional support.
Financial barriers faced by adult children
Very often it is the adult children who face financial obstacles and who turn to their retired parents for assistance. The high costs of living and the barriers to entry for first-time property owners often results in adult children borrowing from their retired parents. Similarly, retirees very often provide start-up capital to adult children wanting set up their own businesses. Lending one’s retirement capital to the younger generation comes with inherent risks, the most obvious of which is the risk of not having the loan repaid. In many circumstances, adult children borrow freely from their retired parents without having full insight into their financial circumstances. The assumption that one’s parents are adequately funded for retirement is a dangerous one to make and can lead to some nasty surprises later on in life. Financial transactions between retirees and their adult children should take place in the context of transparency around their financial affairs, their retirement provisions and how the loan will impact on their future planning.
The fact that only 6% of South Africans can afford to retire is both frightening and unsurprising. With advances in healthcare and medical science, retirees are living longer than ever before – with many of them outliving their retirement capital. Get-rich-quickly schemes and Ponzi scams have generated their fair share of victims who now face severely under-funded retirements. Sadly, many young South Africans who have chosen to live and work abroad remain oblivious to their aged parents’ financial circumstances. A combination of lack of communication, family feuding and generational differences often results in adult children being completely oblivious to their parents’ retirement funding woes. In many situations, adult children find out about their parent’s funding shortfall at a time when they are financing their own children’s tertiary education – notwithstanding their need to fund for their own retirement – placing them in an unenviable financial position. Multi-generational financial planning seeks to open the channels of communication between the older and younger generations so as to reduce the likelihood of surprises later on.
Mental incapacity, terminal illness and special needs
The onset of life-threatening illnesses, particularly those that impair mental capacity, should automatically prompt the need for multi-generational financial planning. Dementia and Alzheimer’s Disease, where mental deterioration is inevitable, should elicit discussions around power of attorney, curatorship and administration of the estate – if and when the time comes – and it helps to have adult children involved. To be effective, financial planning in circumstances such as these should take place while the person diagnosed is still of sound mind and able to sign essential estate planning documents such as a will, codicils, living will and power of attorney. A person diagnosed with a terminal illness will also want to consider organ donation as part of their legacy. Similarly, ongoing financial provision for a special needs child will need to be carefully planned for, and this will inevitably involve siblings and family members likely to outlive the parents of the child.
The financial and emotional complexities of modern-day blended and extended families can be exacerbated by ineffective estate planning and lack of communication. In many instances, the legacy that loved ones are expecting and what is actually bequeathed in terms of the will are vastly different – causing tension, family feuding and long-term damage to relationships. To avoid confusion, in-fighting or even the possibility of having one’s will contested, communication with one’s intended heirs and beneficiaries is strongly recommended. Having spent a lifetime building assets and creating wealth, it is only natural that passing one’s legacy on to the next generation can be highly emotional. Because of this, many retirees prefer to involve their adult children in decisions such as down scaling the family home or putting the holiday home on the market. Careful planning and considered communication during one’s lifetime is key to ensuring that both assets and relationships are preserved in the transfer of wealth. Multi-generational estate planning allows heirs and beneficiaries to ask questions and gain clarity while you are alive, rather than spending the rest of their lives second-guessing the intentions behind your will.
Business and philanthropic succession
Succession planning for family-owned businesses can be highly emotive, especially in instances where a business has been passed from generation to generation. Steeped in history and hard work, there is more to business succession planning than a transfer of shares. Have your children demonstrated a real interest in the business? Are they capable of taking over the reins of the company? How will the transfer of business assets take place? Do they appreciate the hard work that went into creating the business? Do they share and will they continue to respect your vision for the future of the business? Multi-generational business planning seeks to pass on not only assets but also the value system and philanthropic pursuits of the owner, which in turn creates a set of shared values and stronger family bonds. Engaging one’s adult children, and possibly even grandchildren, in the planning process increases the chances of long-term business sustainability.
Multi-generational financial planning helps families to create a foundation for passing on both wealth and values from one generation to the next. Protecting the assets of the client and the relationships of those left behind should be the main objectives of the process, with open and honest communication at the heart of the process. Although a will is a powerful legal tool through which to voice your intended legacy, there is no voice as powerful as the one you have while you are still alive.
Have a wonderful Wednesday.