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
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.