Wealth transfer across generations

Feel free to reach out to PSG Wealth Manager  Dawie Klopper  directly.

In the lives we all lead, many people accumulate wealth. For example, a farmer’s land becomes valuable and must now be transferred to the next generation, and possibly even the grandchildren. However, this must be done efficiently.

I am part of the so-called ‘baby boomer’ generation, which, in the 1980s, got married relatively young and often had children at a young age. Those children are now approaching their 40s, and their children are already in school, some even in high school.

In 15 years’ time, the grandchildren will be young adults, and the children will be nearing retirement. How should one approach this situation? It may help to think about the concept of generative wealth transfer.

This concept can be supported by developing a set of family values. Values help establish expectations and responsibilities for heirs. For instance, if independence and self-reliance are valued, the wealth transfer plan may encourage heirs to pursue their own careers before gaining access to certain assets.

Family values can foster a sense of collaboration in managing the family’s wealth. Regular family meetings, where shared goals are discussed and decisions are made collectively, can promote unity and transparency.

When deciding how to structure the transfer of assets or wealth, careful consideration must be given to what the benefactor wants to achieve.

A few years ago, I worked with a family where a highly successful father wanted his two children to inherit through a trust. Knowing that his daughter and her family were not financially well off, he stipulated that they could receive the income generated by the trust’s assets. Meanwhile, his son would benefit from all the growth the trust generated.

Now imagine what happened. The father’s good intentions led to significant conflict among the heirs. The daughter wanted the trust’s assets to be invested in income-generating investments, such as income funds with high yields. However, the son preferred the assets to be invested in so-called growth stocks, which typically offer exceptionally low dividend yields, significantly reducing the daughter’s income. The problem with the income fund, on the other hand, was that the value of the investment would remain constant, disadvantaging the son’s needs.

This created an impossible situation, arising because the father hadn’t considered the unintended consequences of his well-meaning intentions.

My point is that there are better ways to handle these matters. Moreover, most baby boomers are reluctant to discuss their financial matters with their children. The children might make their own calculations about what is coming their way but could be surprised in two ways. On the one hand, their parents may still have debts, creating the illusion of wealth. On the other hand, there may be a significant investment portfolio that the father has managed in collaboration with an adviser but kept under the radar.

Suddenly, the children inherit a large traditional equity portfolio but lack the knowledge to manage such wealth. In their social circles, they might discuss speculative assets like cryptocurrency, art, or private equity investments.

Wealth transfer between generations and the associated financial planning is a multifaceted process requiring careful consideration, effective communication, and strategic execution. By addressing the needs and goals of each generation, families can build a robust financial foundation, preserve wealth, and ensure a lasting legacy. Through early planning, professional guidance and continuous adjustments, families can navigate the complexities of financial planning and secure their financial future for future generations.