Preserving wealth across generations

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John Kennedy, Director and Regional Head: Cape Town, Citadel


John Kennedy

People hate losing money.

In fact, this aversion to the loss of money is so significant it has become the subject of a substantial number of studies. The “pain” that is felt when people lose money is stronger than the “joy” of a gain. And it is even more pronounced when a person has worked hard to build their capital base, often through diligent behaviour and determination, over many years – possibly even a lifetime.

However, it is in families, where a parent has built a legacy for his or her children that the potential for loss particularly comes to the fore – many wealthy families seldom see the transition of their wealth beyond the second and third generations. As a result, the successful transfer of wealth should entail more than just tax planning and careful investing.

One of the most effective ways to preserve such assets is to have governance structures in place to protect them, and there are three elements to this:

1.     A succession plan

Once the capital has been established it needs to be managed, and a plan must be put in place to ensure that this continues. A set of people need to be mandated to continue with managing the assets, for an indefinite period of time.

These need not be the family members, as there can often be issues amongst siblings regarding its future management while some family members may also be reluctant, unprepared, or even unable to take this role. But, more importantly, future generations will not even be known, so it would be impossible to predict their level of interest in or aptitude for managing the assets. It might also be easier for non-family members to act impartially in all circumstances.

2.     A suitable investment policy

Once the capital has been built, it needs to be managed appropriately and if an investment policy is laid out in advance, then its supervision and control will be better organised. An investment policy establishes the goals and boundaries within which decisions will be made, leading to clearer and more rational decisions. This means that investment decisions will be more objective even during periods of market disruption when an emotional response might be more likely. In this way, a family can aim to protect its wealth and ensure that it is attended to prudently.

An investment policy also establishes accountability and serves as an overarching strategic guide for planning and implementing the investment programme. It allows for aspects such as asset allocation, risk monitoring and management as well as reporting.

3.     A suitable distribution policy 

A key element of preserving wealth is determining when and how proceeds are distributed. It is important to stipulate upfront how the proceeds generated by and the future sale of the assets will be distributed, to whom and when this will take place. Not only will this manage the expectations of future generations, but it will also guide and control the ongoing preservation of the assets.

You can decide how much discretion should be afforded the decision makers and under what circumstances such discretion is allowed. Pay-outs are often linked to certain ages for future generations, with 25, 30 and 35 years having been quite common, although experts caution that 25 is almost certainly too young to properly manage large sums of money. Sometimes pay-outs are provided on an as-needed basis, and sometimes they can be stipulated.

Ultimately, the key is that this should be the culmination of a carefully thought-through process with deliberate decisions having been taken and nothing left to chance.

By putting a governance structure in place, families will be able to protect their assets and overcome the potential risk of future generations not being good stewards of the wealth.

It is equally important that the plans to preserve wealth are communicated to family members to manage their expectations, as well as providing them with the opportunity to discuss their investment values and precepts. It also affords families the occasion to educate and provide tools to prepare each generation to successfully handle the wealth.