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This is also borne out by surveys showing that the list of the UK’s 1 000 wealthiest families and individuals is a "revolving door" (as mentioned in The Sunday Times Rich List, April 2017).
The old saying has stood the test of time, especially as tax, estate planning and exchange controls have grown in complexity. These add to the list of potential pitfalls that end up eroding the transfer of wealth management between generations.
Generations and siblings of wealthy families are nowadays also more likely to find themselves spread out across different countries, with regulation in different jurisdictions adding to the complexity, while the structure of families is changing: second marriages mean second groups of children.
So, how does a family ensure that wealth is not lost over the generations? This and other questions were top of mind for Investec clients who recently attended our series of In Conversation events around the country, with the theme being Intergenerational Wealth Planning. (In Conversation is an annual series of events initiated by Investec, featuring South African thought leaders who give insight into various issues.)
The event examining Intergenerational Wealth Planning was an Investec One Place™ collaboration between Investec Private Banking and Investec Wealth & Investment, with large numbers of Investec’s high net worth clients in attendance.
Our panel included Alexandra Nortier and Marc Romberg, Investec Wealth & Investment’s joint heads of wealth management; and Rene van Zyl and Lizzie Fick, part of the fiduciary and tax team at Investec Wealth & Investment.
WATCH VIDEO: Why conversations are key to preserving wealth through the generations
Perhaps apt for the In Conversation theme, all of the panellists stressed the importance of families having meaningful conversations about wealth planning and management, starting as early as possible. Said Nortier: "What we've found is that that the families who transfer wealth positively are the ones who start the conversation [about wealth] early. They educate and they mentor."
Stewards of the family's wealth may end up taking excessive risks or, alternatively, invest in very low-risk investments and find the wealth being eroded by inflation.
Romberg offered up some of the reasons wealth doesn't make it to the third generation. One reason is simply fragmentation: the inheritance is spread out across a broad range of heirs. Others are poor returns on investments or a lack of interest by heirs in managing the family fortune.
Stewards of the family's wealth may end up taking excessive risks or, alternatively, invest in very low-risk investments and find the wealth being eroded by inflation. Poor tax planning can also erode wealth, while conflict can lead to poor decisions.
"A lack of strategic planning, mainly around succession planning, is perhaps the main reason," said Romberg. To avoid this, family members need to engage in an open conversation on the subject, for starters.
Families who transfer wealth positively are the ones who start the conversation [about wealth] early.
Keeping the conversation going
With this idea of keeping the conversation going, at each of our In Conversation events, we surveyed the audience on a number of key questions dealing with intergenerational wealth planning.
The survey was conducted by having audience members press keys on a small device on their seats, ensuring anonymity and instant results.
A total of 1 331 Investec clients at seven different events participated in the survey, and there were some interesting results. We show the results below, accompanied by the panellists' comments.
What is more important to you?
a) Ensuring your heirs are better off
b) Contributing to your community, society at large, or the environment
With 76% of the audience choosing the first option and 24% choosing the second, it’s clear that our clients are keen to leave their heirs in a comfortable position – but there is also a keenness to contribute to making the world a better place. This imperative may grow in future years, especially in the light of worries about global warming, poverty and biodiversity.
Romberg pointed out that for millennials and the Generation Z group (those born in the early 1980s and later), "it isn't just about financial profits. So, we are likely to see a greater focus on impact investing from here onwards".
But the two goals needn't be mutually exclusive. With proper planning, a wealthy family should be able to serve both imperatives.
For millennials and Gen Zs, it isn't just about financial profits, so we are likely to see a greater focus on impact investing from here onwards.
Do you have family discussions around succession, wealth distribution and philosophies when it comes to dealing with money?
How prepared do you feel you are to transfer your wealth to the next generation?
d) Not at all
The above questions deal with some of the structures and agreements that families put in place to manage their wealth. A well-drafted will is an obvious starting point, but as well as being up to date, a will needs to take into account the different tax regimes where assets reside, along with any change to legislation in the different jurisdictions (see below for more detail).
Fick made the point that trusts are a useful succession planning tool. They can be useful in protecting beneficiaries and instilling core values. Nonetheless, trusts do face a number of challenges on the tax front that founders need to be aware of.
Many wealthy families have adopted a family constitution as a way of instilling values and managing conflict. Although a family constitution is a non-binding document that can take many forms, it is a robust way to manage the intergenerational wealth transfer and to build consensus on key issues, such as:
- Who runs the family business
- Key ethical and moral issues
- Investment strategies (which can include ethical issues, such as socially responsible investments)
- The family’s philanthropic vision.
"The family constitution can be as detailed and formal as you like, or it can be short and simple, provided that it clarifies and supports the family's key philosophies," said Nortier.
What is the current geographic split of your investable asset base (SA versus offshore)?
a) 100% SA investments
b) 70% SA; 30% offshore
c) 50% SA; 50% offshore
d) More than 50% offshore
It's really important to have a family roadmap to deal with all of the tax and estate planning complexities.
Families across continents
This question not only speaks to the importance of a well-diversified investment portfolio – of which offshore investments are a key component – but also to the challenges of complex modern families and where their assets are. In our survey, 20% of the audience were fully invested in SA, 40% had 70% of their investments in SA, 19% had their investments equally split between SA and offshore, and 17% had more than half of their investments offshore.
"Family units are becoming more complex and more international," explained Van Zyl, "with beneficiaries and assets in different countries. Blended families add to that complexity. Where family members reside and where assets are situated significantly influence how best to preserve family wealth. This must be taken into consideration when drafting a will."
The once-sacred principle of banking secrecy has been rendered obsolete, thanks to the enactment in 2010 of the US Foreign Account Tax Compliance Act (FATCA), and a FATCA-like regulation known as the Common Reporting Standard (CRS).
The CRS is a legal framework developed by the Organisation for Economic Cooperation and Development in 2014. It aims to facilitate and standardise the exchange of information on residents’ assets and income, primarily for taxation purposes, between numerous jurisdictions around the world. It calls for signatory countries to share such information automatically (as opposed to sharing it on request), and on a mutually beneficial basis.
The implementation of the CRS means that the SA Revenue Service (SARS) will, more than likely, discover any undeclared offshore funds, whether they are held in complex structures or not. SARS is now able to automatically gain access to financial information relating to South African tax residents’ offshore dealings and their offshore structures.
Situs is Latin for 'position' or 'site'. On death, South African residents are liable for estate duty based on their worldwide assets. Estate duty is currently levied at a rate of 20% in the case of an estate valued at less than R30m, and at a rate of 25% on the value above R30m. But there are also situs taxes levied in the US, the UK and elsewhere for assets held there.
"It's vital that the executor understands the different requirements in different countries," Van Zyl told the audience.
Also important is for families to plan accordingly and to get the right advice when it comes to intergenerational wealth management.
As Fick concluded: "It's really important to have a family roadmap to deal with all of the tax and estate planning complexities. This entails having a family constitution, along with well-drafted wills and trusts that take into account all of the legal possibilities. These are your essentials."
About the author
Patrick writes and edits content for Investec Wealth & Investment, and Corporate and Institutional Banking, including editing the Daily View, Monthly View, and One Magazine - an online publication for Investec's Wealth clients. Patrick was a financial journalist for many years for publications such as Financial Mail, Finweek, and Business Report. He holds a BA and a PDM (Bus.Admin.) both from Wits University.