Planning Perspectives with Palesa Tlholoe

Three powerful tools to create generational wealth

THANKS mostly to social media, generational wealth is a topic that has gained popularity recently. Perhaps it’s the recognition that it is possible to create something that you were not fortunate enough to have received yourself.

There are three main estate planning tools you can use to create generational wealth, depending on your needs and personal circumstances: a will, life cover and the creation of a trust.

1. A will provides a way

A will is used to stipulate how you want your assets to be inherited upon your death. If you have minor children, you can also nominate a guardian who will be legally responsible for them.

If you die without a valid will, you are considered to have died “intestate” and the Intestate Succession Act will dictate how your assets are distributed. The problem with this, besides the bluntness of the whole process, is that your estate might be subjected to high taxes and fees that will need to be paid before any beneficiary distributions are made.

Money might not be readily available, depending on the structure of your estate.

Rather don’t leave things to chance. A well-planned estate uses a will to distribute assets in a way that will lower inheritance tax and improve the efficiency of winding up the estate. It’s always best to consult with a Certified Financial Planner (CFP) or an estates expert when drafting your will. There are many things to consider, including inheritance tax, transfer fees and executor fees. A professional will make sure all of these are accounted for.

2. Life cover pays

One suggestion your financial planner might make is to take out a life insurance policy, which will cover all the fees and taxes in the event of your death, and probably also leave a sizeable lump sum for your heirs. Life cover is powerful in that it delivers wealth to your heirs at a reasonable and attainable cost, by simply paying your monthly premiums while you’re alive.

An endowment policy is sometimes used for the same purpose – it allows for the transfer of assets to your heirs directly – but it’s a slightly more complicated financial instrument and requires expert input.

3. Secure it in a trust

A trust is a legal relationship where the founder gives up control of his or her assets to a board of trustees, for the benefit of the trust’s beneficiaries. There are several types of trusts, but in estate planning there are two main types: an inter vivos trust (or living trust); and a testamentary trust, which is created upon the death of the founder through an instruction left in his or her will.

Depending on how it’s set up, an inter vivos trust can eliminate inheritance tax, as the assets in the trust are not affected by the death of the founder. The disadvantage of any trust, however, is that they cost more. Annual taxes are high and there are administration fees to consider, both of which make trusts unattractive for many people.

In conclusion

Building generational wealth is not an easy journey, but with an expert by your side you can create a customised estate plan that will result in a meaningful legacy. If you’re not sure where to find a CFP, visit fpi.co.za for a list of qualified professionals near you.

Palesa Tlholoe CFP, co-founder and wealth manager at Imvelo Wealth