Ways to pass on wealth

The more money your family accumulates, the more complex it can become to decide how much to invest, what to buy, which strategies to apply, what to bequeath and how to minimise transfer taxes.

There are likely to be emotional issues to consider, since inheritance can be a sensitive subject.

These include questions about who the primary beneficiaries should be, how fast it should be moved to them and whether it will spoil younger generations or create conflict or resentment.

Further, the first generation must determine safeguards to ensure the funds are spent responsibly and to retain enough flexibility so they can adjust their wealth transfer plans if their circumstances change.

Initially, a family’s wealth is determined by the success or failure of a few individuals.

As their wealth grows, limited capital is concentrated into one or two strategies, such as shortterm, high-yield investments collateralised with rental property to grow current income or retirement benefits rapidly.

Succeed in doing that and the family creates an asset capable of generating substantial additional passive cash flow beyond what’s needed to meet family expenses.

The family’s wealth accumulation strategy must now shift towards diversification.

Creating a diversified financial portfolio results in simultaneous wealth growth and preservation.

The family must deploy some of the capital into other operations with good growth potential and in which they have expertise.

Multigenerational wealth planning should be to disaggregate wealth into “core” and “excess” capital. This will drive a family’s decisions about both asset allocation and wealth transfer.

The first generation’s “core capital” – the minimum amount needed to maintain their lifestyle – should be invested in a balanced mix of traditional, liquid assets.

“Excess capital” – wealth in excess of their core capital – should be earmarked for future generations and allocated in a way that matches those beneficiaries’ risk profile, time horizon and needs.

This bottom-up approach can enhance overall wealth without putting the first generation’s lifestyle at risk.

After the various portfolios are sized and invested, the first generation should use strategies to move their excess capital to their desired beneficiaries in a tax-efficient manner, in the right proportions, at the right speed.

We’ve found many families can achieve most or all their wealth transfer objectives using a mix of basic estate planning, gifting and incentive trusts.

The key is scaling the amount committed to a “rolling” transfer strategy to meet objectives.

Mduduzi Luthuli is a director at Luthuli Capital