Oran Hall | Preserving intergenerational wealth

There is a buzz about intergenerational wealth, but it is not new. What is new is the increase in the types and value of assets that people own accompanied by increased knowledge about asset accumulation and distribution.

What should be of significance is how effective beneficiaries are in preserving the wealth that has been created, grown and passed down to them by their parents and other family members and creating their own wealth.

Intergenerational wealth is the creation, accumulation and transfer of assets and opportunities from one generation to another within a family. It is quite natural for senior members of a family to set out to make younger family members better off than they were when they were young.

There is, however, no unanimity on whether they should do so. While there are some who support this, there are others who see this as “spoiling” younger family members, thus encouraging them to become unproductive and to waste the efforts of their forebears. But it is possible to reduce the risk of this happening.

There are several ways to create and accumulate wealth depending on the sums available especially in the early years, the knowledge, sophistication, skills, risk appetite and the time available to the person accumulating the wealth to devote to the wealth-building programme.

Individuals may own businesses, real estate – commercial and residential – securities, such as stocks, bonds, unit trusts, mutual funds, preference shares, and some of the more sophisticated instruments such as futures and options. Assets may be local or foreign.

There are several tools to transfer wealth from one generation to another including, wills, inter vivos gifts – transferred while the given is alive – inclusion in family businesses, and trusts. Which strategy is most suitable depends on the cost of transferring the asset, such as legal fees and stamp duty, where applicable; the type of assets; the needs and age of the beneficiaries; the size of the portfolio of assets; the skill required to manage the assets; and the scope it gives the transferor to have a say in their management should that become necessary, as well as the ability of the grantor to revoke a gift.

Family members should always consider their own needs when considering to pass on assets to other family members. They should decide if they will need income such as interest from bonds and money market securities and dividends from stock, for instance, to contribute to their living expenses before transferring them while they are alive.

Family members transferring wealth should make every effort to make the process smooth; they should keep an up-to-date record of all assets and liabilities, they should ensure that they have indisputable title to the assets, they should make it crystal clear who the beneficiaries are, they should ensure that there are no financial obligations to the government, businesses and people attached to the assets.

Where there is a trustee in the case of a trust and an executor in the case of a will, they should make every effort to ensure that they are reliable and trustworthy.

It is better to put a plan in place and change it later than not to have one. The risks are too great. For example, not having a will can cause delays, high legal expenses, assets to go to people they were not meant to go to, and serious family fractures.

There is the risk that the wealth that family members inherit can be seriously eroded – by the market but also by mismanagement and waste, for transferring wealth is not the equivalent of transferring the skills to manage it. Sharon Olson, Forbes Finance Council member and president of the Olson Wealth Group, makes some suggestions about how a family can prepare itself to preserve generational wealth. Here are some of her suggestions:

• Set overarching goals and aspirations regarding wealth management and distribution;

• Educate family members about wealth accumulation and distribution through family meetings, for example, giving a “voice” to each family member, including children;

• Normalise conversations about money;

• Build a long-term tactical plan for the wealth of the family;

• Set expectations for how family wealth should or should not be spent;

• Determine how wealth can remain a tool to achieve long-term family objectives rather than it being a defining aspect of identity;

• Encourage teenagers and young adults to invest as soon as they start earning so they can appreciate the power of compounding and the appreciation and depreciation of the value of assets;

• Encourage family members to work and learn the responsibilities that comes with it; and

• Give family members real-life experiences and, where possible, create opportunities for them to engage with subject matter experts.

Important as it is to create and grow wealth for the later generations of a family to rise above the financial situation of their forebears, it is critical to take steps to prevent the erosion of the wealth.

Training family members to appreciate wealth and to handle it responsibly, being prepared to set and work towards long-term goals and to make behaviour change, where necessary, are key to the preservation and growth of a family’s wealth. But each generation must create and grow its own wealth as well.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.finviser.jm@gmail.com