Tackling intergenerational wealth planning in a complex world

The modern reality of families spread out across the globe means a greater emphasis needs to be placed on how the dispersal affects the ability to transfer wealth between generations – and leave a legacy.

It’s a common desire among wealthy families to leave a legacy – either through ensuring the financial well-being of heirs or through a foundation to make bequests to worthy causes. 

However, families face an ever more complex world. Failure to take the complexities of our times into account can mean a diminished estate from which to distribute assets or, in some cases, assets being locked up for years before disbursement.

Families not only need to choose wisely from the array of investment options available, but also to navigate astutely the plethora of laws and regulations in order to preserve, grow and transfer their wealth in the most efficient manner possible.

But the nature of the modern family also presents new challenges. The traditional idea of a nuclear family has given way to a more multifaceted reality. 

Families are less units of generations easily mapped out in a family tree than complex, interacting ecosystems. Second or third marriages, with different sets of children, are now commonplace, while longer life expectancies mean a longer wait before heirs can claim their inheritance, in many cases. 

The global family

One of the biggest challenges comes in the ways families are dispersed around the globe. Globalisation – one of the key trends of the late 20th and early 21st centuries – has opened up not just markets in goods and services, but also for skills. 

Top people in different professions are in demand wherever there are incentives to ply their trade. These incentives could be financial (better pay, tax regimes), lifestyle (security, culture, climate) or other benefits (access to health, education and other social goods). Sometimes people simply go where their heart takes them.

This global market began to open up for South Africans in the 1990s, thanks to the end of apartheid and the removal of sanctions, and has continued ever since. Apart from their own physical mobility, South Africans are finding their capital is more mobile than before, thanks to the relaxation of exchange controls over the past 25 years.

It’s no longer unusual for families to be scattered across continents, with the older generations still based in South Africa but younger ones settled as far afield as the UK, the USA, Australia and New Zealand – and many other places besides.

For families managing their intergenerational wealth transfer, this presents a number of issues to consider. Chief among these is the need to consider the domicile of both assets and beneficiaries, and how these are governed by the different jurisdictions. 

It’s no longer a case of drawing up a will and expecting all the different elements to slot into place. To ensure a smooth transition, families need to take into account a number of moving parts. Where family members reside and where assets are situated significantly impact how one preserves family wealth and must be taken into consideration when drafting a will, for example.

LEFT: Alexandra Nortier, joint head of Wealth Management, Investec Wealth & Investment.
RIGHT: Elizabeth Fick,
joint team leader Investec Advisory:
Tax and Fiduciary.

Elizabeth Fick, of the Investec Advisory: Tax and Fiduciary team, highlights two particular areas that families need to pay attention to.

First is the sharing of information between tax authorities in different countries. Regulations like the US Foreign Account Tax Compliance Act (FATCA) and FATCA-like regulations such as the Common Reporting Standard (CRS) mean that information on tax affairs can be shared between the tax authorities. The failure to comply in one jurisdiction can thus impact on the processing of an estate and inheritance, Elizabeth warns.

FATCA and CRS mean that SARS is likely to discover any undeclared offshore funds. “SARS can now gain access to financial information relating to SA tax residents’ offshore dealings and their offshore structures,” says Elizabeth.

Secondly, families need to consider different estate tax regimes and duties in different countries, known as situs taxes. Should assets sit in different countries, the estate will be liable to different taxes in those countries.

Elizabeth explains that, 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 of less than R30 million and 25% above that, but there are also situs taxes levied in the USA, UK and elsewhere.

“The failure to take situs into account can lead to nasty surprises in the form of estate tax, which in turn can undermine your plans and goals in how you want your assets to be disbursed after your passing. Not only do your heirs risk losing out, but so does any foundation or charity to which you had earmarked funds,” she points out.

Alexandra Nortier, joint head of Wealth Management at Investec Wealth & Investment, says situs and compliance need to be seen in conjunction with asset allocation. Global diversification is key when it comes to building a portfolio for heirs spread out across the globe.

“Families need to plan carefully around the jurisdictions where assets are held. You may need a will in certain jurisdictions to speed up the probate process. I know of a recent case where a client died with significant assets in New York, where there was no New York will, and the estate was in its sixth year of still being wound up,” Alexandra says.

“Heirs may want the option of continuing to hold the assets you’ve bequeathed or of liquidating them. Presumably, any charity or foundation that you’ve earmarked in your will may choose liquidity over holding the assets. A globally diversified portfolio in shares, bonds and other liquid assets helps them to do so,” she points out.  

Families who have trusts need to exercise caution when beneficiaries emigrate. If a beneficiary becomes a US taxpayer, for example, not only the beneficiary, but the trust itself can be subject to massive penalties if not appropriately structured.

Countries with high tax rate regimes, such as the Nordic countries, often charge a high rate of tax on disbursements from a trust. But Alexandra warns that families should look at the big picture when a family member emigrates. “With high rates of tax often comes a high level of social services, such as free access to quality education, healthcare and security, things you have to pay for in South Africa. So the higher tax burden may be worth it.”

The importance of a family constitution

A globally dispersed family implies greater potential for lines of communication to break down between and across generations, leading to conflict. Families need to keep those lines of communication open to avoid the pitfalls that arise, such as the different tax regimes and regulation.

Keeping in regular contact is one thing, but families shouldn’t avoid the often tricky conversations they need to have around finances, however complex and daunting they may be. Failure to do so may lead to complacency or too much of the burden of stewardship of the family wealth falling on a few individuals.

“Families that transfer wealth positively are the ones that start the conversation [about wealth] early. They educate and they mentor,” says Alex­andra.

A family constitution is a way of instilling values, managing conflict and allocating responsibilities. A family constitution is a non-binding document that can take many forms, but is a robust way to manage the wealth transfer and build consensus around key issues such as:

  Who runs the family business

  Key ethical and moral issues

  Investment strategies (including ethical issues, such as socially responsible investments)

  Legal documents that need to be drawn up (e.g. wills and trusts)

• The family’s philanthropic vision – Investec Wealth & Investment’s Philanthropy team can help with this process. 

“The family constitution should provide a road map for the tax and estate planning complexities that arise,” says Alexandra. “This can then lay the groundwork for well-drafted wills and trusts that take into account all the legal possibilities.” 

Complexity needn’t be a hindrance to families in achieving their wealth and legacy aims. With the right building blocks in place, helped by skilled and committed advisers, families should be able to achieve their goals. 




For more information, contact Investec on 0800 1 PLACE (75223)