How to avoid losing a fortune in under five years

HE 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.