Getting under the skin of Wealth Planning

Why is wealth planning so important? And how does estate planning play a role?

Let’s look at a scenario in which momentum has been built up in terms of passing wealth on from one generation to another. Nobody in your family talks about money and your father has been working so hard he hasn’t taken the time to speak to you about what might happen in the event of his death.

Imagine then, that you are 40 and your father dies suddenly. You learned he’s amasses R10 million, but you are in the dark when it comes to the family’s finances and you have no idea where that money is. The inheritance falls like a dead weight on your shoulders and you realize that each day his wealth may be eroded because money is not being reinvested, funds are languishing in unknown accounts and even your father’s will does not clarify matters.

It has been shown that is there is no active management on wealth across generations, about 30% of your wealth is automatically lost when you die. It just erodes like any asset that is left untended. Business can rust as well! Quite quickly actually.

If your father (and your grandfather) had planned how they would pass on their wealth, then the baton would not have been dropped upon your father’s death, with some perhaps dire consequences

Understanding asset silos

Many of us don’t understand that the rules applying to our pension say, differ from those applying to the household objects we bequeath in a will. Not all assets  can be disposed of in the same way and some positively need to be separated out from our broader estate.

These ‘silos’ look like this:

  • Your personal assets can be disposed of in terms of a will. We have freedom to testation in South Africa, which means anyone has the right to dispose of their assets as they see fit. Choosing a good executor is critical as he or she has a legal duty to administer your estate. You ideally need someone who can see this through responsibility, over time. Think about who you’ll leave your assets to, as they’ll pay estate duty on them at some point. Clever planning and drafting can maximize opportunities within the Estate Duty Act. Remember that any problems with liquidity will result in a delay in the administration of your deceased estate, so put plans in place in your lifetime.
  • Your pension is governed by the Pension Fund Act and any policy documents pertaining on this have their own rules and regulations. There is often significant wealth locked away in pension, provident and annuity funds, so consider the transfer of defined-contribution provident and annuity funds carefully.
  • A trust is managed by trustees and governed by a trust deed – again, there are rules and regulations that apply here.

Components of Wealth Planning

Yusuf Dukander, Project Director: Financial Services at the South African Institute of Chartered Accountants (SAICA) believes you should be thinking of your future from age of 20 – if you wait until age 30, then you’ve already lost 10 years of capital growth.

You need to look at:

  • Identifying a framework within which to work off and build on – and sticking to it!
  • Setting up an investment portfolio
  • Consideration of Income Tax implications
  • Factor in Capital Gains Tax issues
  • Look at wealth protection and insolvency implications

There is no one-size-fits-all model when it comes to wealth planning, as each family and household unit different, but involving your spouse does make for a more informed, transparent process on sustaining wealth for the next generation.

Dukander suggests you watch out for:

  • Not updating your will – this can cause huge problems should you die suddenly
  • Setting up finance vehicles without carefully planning for the future (for example, watch out for clauses inserted in trust deeds and make sure you understand the implications)
  • Instant gratification schemes. Too many people fall for these, when they should focus on sustainable saving and investing

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