How to avoid los­ing a for­tune in un­der five years

The Star Early Edition - - COMPANIES - Ka­belo Khu­malo

THE COM­FORT­ING snap of a Birkin bag, the thun­der­ous hooves of polo ponies, the gen­tle splash of a dol­phin trail­ing a su­pery­acht. The sounds of true wealth. Sounds many young heirs will only hear in their mem­o­ries since about 70% will squan­der their wealth within five years of in­her­it­ing it.

Why? The rea­sons are deep and com­plex, but among the most of­ten cited are poor suc­ces­sion plan­ning, lack of com­mu­ni­ca­tion and low lev­els of trust.

Mar­teen Michau, Head of Fidu­ciary and Tax at San­lam Pri­vate Wealth, says a 2016 PwC sur­vey re­port sheds a lot of light on this is­sue. “The com­pany con­ducted in­ter­views with the own­ers of over 2000 fam­ily busi­nesses, all with a sales turnover of more than $5 mil­lion. They found that only 15 per­cent of fam­ily busi­nesses had busi­ness suc­ces­sion plans in place.”

Avoid­ing cru­cial money con­ver­sa­tions may have dire con­se­quences for fam­ily for­tunes. Michau says it is pos­si­ble that the fear and taboo of­ten as­so­ci­ated with talk­ing about suc­ces­sion and in­her­i­tance means that the con­ver­sa­tion gets de­layed, of­ten un­til chil­dren are in their late twen­ties or early thir­ties.

“It is risky to leave plan­ning and con­ver­sa­tions un­til the last minute. Par­ents have to ed­u­cate their chil­dren as young as pos­si­ble about how the wealth was gen­er­ated and how it is sus­tained. It is im­por­tant to teach chil­dren how trusts are struc­tured and how they work.

They need to know as much as pos­si­ble about the fam­ily for­tune in or­der to ap­pre­ci­ate it, grow and pre­serve it.”

She says there are cru­cial things which need to be high­lighted to off­spring early so that they have a re­al­is­tic view of their future fi­nances.

“One of the crit­i­cal con­ver­sa­tions is taxes. As shown in a re­cent sim­u­la­tion by San­lam Pri­vate Wealth, this is one of the fi­nan­cial obli­ga­tions that im­me­di­ately slashes wealth when it is trans­ferred to the next gen­er­a­tion.”

The sim­u­la­tion gave five chil­dren a re­al­is­tic view of what would hap­pen to their money once it was in­her­ited.

The youths were as­ton­ished to see how much of their par­ents’ hard-earned money would need to be paid to the tax­man. Taxes can shave 38% off a for­tune al­most im­me­di­ately. For a R20-mil­lion in­her­i­tance, that will be a stag­ger­ing R7.6-mil­lion to the gov­ern­ment.

Michau says that tax plan­ning is in­trin­sic to es­tate plan­ning. “What most peo­ple don’t re­alise is that in South Africa we have to pay both es­tate duty and cap­i­tal gains tax on death - of­ten on the same as­sets. Fam­i­lies should en­sure there is liq­uid­ity in their es­tate to pay these taxes or the ex­ecu­tor will be forced to sell as­sets to pay them be­fore an es­tate is be­ing trans­ferred.”

It seems par­ents also lack faith in their heirs’abil­ity to pre­serve and grow the fam­ily for­tune.

In an­other study, this time by The Al­ter­na­tive Board (TAB), it was found that 62 per­cent of fam­ily busi­ness own­ers didn’t be­lieve their com­pa­nies would re­main fam­ily-owned in the next gen­er­a­tion. 29% of par­ents said they had no suc­ces­sion plan in place, while an­other 26% ex­pressed un­hap­pi­ness with the plan they did have.

The study also found that 40% of the own­ers be­lieved non-fam­ily em­ploy­ees were more qual­i­fied to run the busi­ness than their fam­ily mem­bers.

The TAB study rec­om­mends fam­i­lies draw up a de­tailed suc­ces­sion plan that lays a firm foun­da­tion for heirs.

Chil­dren must also be­come more in­volved in the fam­ily busi­ness and in­vest­ments at a young age so they are ex­posed to the re­al­i­ties of en­trepreneur­ship and in­vest­ment. They should be trained in pro­fes­sional and tech­ni­cal skills so they are equipped to keep the fam­ily busi­ness flour­ish­ing into future gen­er­a­tions.

Michau says that a fam­ily es­tate plan must not be static and must re­spond to is­sues like changes in leg­is­la­tion and other fac­tors that would al­ter the fam­ily’s plans and fi­nan­cial im­per­a­tives.

“The role of wealth plan­ners is to fa­cil­i­tate the con­ver­sa­tion about wealth within fam­i­lies by call­ing for a meet­ing and set­ting an agenda. It is also im­por­tant to meet at least once an­nu­ally to as­sess whether the fam­ily plan still mea­sures well against the fam­ily’s long-term ob­jec­tives.”

The San­lam Pri­vate Wealth sim­u­la­tion was recorded and is avail­able to view on­line. It forms part of a larger Fam­ily For­tune ini­tia­tive that al­lows in­di­vid­u­als to in­ter­ac­tively as­sess how their own in­her­i­tance will be spent.

Ex­pert guid­ance from a team of multi-dis­ci­plinary pro­fes­sion­als on how to make wealth a last­ing legacy is also avail­able. Visit: www.the­fam­i­ly­for­

“They need to know as much as pos­si­ble about the fam­ily for­tune in or­der to ap­pre­ci­ate it, grow and pre­serve it.”

Fam­ily two

Fam­ily one

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