Ac­cu­mu­lat­ing R1bn in your life­time is a very tall or­der, but what­ever value of fi­nan­cial legacy you want to leave to your fam­ily, there are some ba­sic prin­ci­ples to fol­low, writes

CityPress - - Business -

Most par­ents want their chil­dren to be fi­nan­cially se­cure and to hope­fully live bet­ter lives than their par­ents, with­out fi­nan­cial stress. Par­ents also want to be able to leave their chil­dren a fi­nan­cial legacy that will pro­vide for in­ter­gen­er­a­tional wealth. This is es­pe­cially true for the many South Africans who were pre­vented from cre­at­ing valu­able in­ter­gen­er­a­tional wealth due to apartheid.

One such reader wrote to City Press with an in­ter­est­ing ques­tion. God­frey Mlaba has a de­sire to build and leave his heirs wealth that could be passed down from gen­er­a­tion to gen­er­a­tion. His in­spi­ra­tion is megawealthy fam­i­lies such as the Rock­e­fellers and Get­tys.

He wants to achieve this by build­ing up wealth with his three sons who are cur­rently 18, 15 and eight years old. “I have started as the sacrificial lamb and am us­ing some of the avail­able sav­ings ve­hi­cles such as a tax sav­ings ac­count for the whole fam­ily and an eq­uity port­fo­lio, as well as a small busi­ness, to amass the wealth.” His tar­get is to ac­cu­mu­late R1 bil­lion in his life­time jointly with his boys and house the wealth in a fam­ily foun­da­tion which will con­tinue to sup­port fu­ture gen­er­a­tions with a max­i­mum draw­down of 4% so that the money never runs out.

R1 bil­lion is a very tall or­der, but whether you are aim­ing at leav­ing a fam­ily legacy of R1 mil­lion, R100 mil­lion or R1 bil­lion, there are some ba­sic prin­ci­ples to fol­low.

God­frey would need to set up a trust to house the fam­ily wealth. Trusts are only ef­fi­cient if you are plan­ning on leav­ing the as­sets in the trust for fu­ture gen­er­a­tions, due to the high in­vest­ment tax payable. If you plan on sell­ing the as­sets within the trust for your own ben­e­fit, dur­ing your life­time, then it is not nec­es­sar­ily a good idea to use a trust. How­ever, in God­frey’s sit­u­a­tion a trust could be a suitable ve­hi­cle, although he should get ad­vice first.

Al­ida Brink, fidu­ciary spe­cial­ist at Old Mu­tual Wealth, says a trust can be es­tab­lished dur­ing one’s life­time (an in­ter vivos trust) or a trust can be set up in terms of a per­son’s will on death (a tes­ta­men­tary or will trust). There is no min­i­mum amount pre­scribed by law nec­es­sary to set these up.

Brink says that if the trust is set up at your death, your will must make pro­vi­sion for it and your last will and tes­ta­ment will also be the trust deed. Your wealth can then be trans­ferred to the will trust from your es­tate.

If you set up the trust dur­ing your life­time, it needs to be reg­is­tered at the Masters’ Of­fice in the re­gion where the as­sets (or the ma­jor­ity of as­sets) will be held.

Some­thing God­frey needs to keep in mind is that you can only do­nate R100 000 a year to the trust with­out in­cur­ring do­na­tions tax. So, while dur­ing their life­times God­frey and his sons can each do­nate R100 000, this means the max­i­mum that can be trans­ferred into the trust would be R400 000 a year. This would cer­tainly not be enough to reach his R1 bil­lion mark. There is an op­tion to cre­ate a loan ac­count but in­ter­est (cur­rently 8%) has to be charged to the trust in or­der to com­ply with the new sec­tion 7C of the In­come Tax Act.

Fi­nan­cial plan­ner Craig Gra­didge says that God­frey could only achieve a goal of R1 bil­lion in his life­time through hav­ing his own busi­ness which should be owned by the trust from the be­gin­ning. In this way, the cap­i­tal in the busi­ness grows within the trust.

Gra­didge says God­frey also needs to en­sure that he is ad­e­quately in­sured from the start and the pro­ceeds of such a life in­sur­ance pol­icy can be paid to the trust. “This will en­sure that his legacy lives on even if he does not live to see it come to fruition. This would mean al­lo­cat­ing some of the funds in­tended for in­vest­ment to suitable life, dis­abil­ity and/or dread dis­ease cover,” says Gra­didge.

God­frey would need to get good ad­vice when draw­ing up the trust deed as this would pre­scribe the type of as­sets that the trust may hold. Brink says it is im­por­tant to note that a South African trust cannot hold off­shore as­sets. Gra­didge adds that a trust cannot own a tax-free sav­ings ac­count so those would have to re­main out­side the trust.

A trust also has oner­ous ad­min­is­tra­tion re­quire­ments and must have an in­de­pen­dent trustee. Brink says it is usu­ally ad­vised that one should ap­point a trust com­pany, au­di­tor or lawyer as an in­de­pen­dent trustee to as­sist with the le­gal and ad­min­is­tra­tion re­quire­ments, and this comes at ad­di­tional costs.

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