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Picture: 123RF/HALFPOINT
Picture: 123RF/HALFPOINT

Wealthy parents are often concerned about the preservation of their hard-earned family fortunes for their children, and rightly so: research has shown that about 70% of young heirs end up failing as custodians of the family wealth, sometimes squandering it within a few years after inheritance. One way for your clients to protect their legacy for future generations is by establishing a family trust.

A discretionary trust, founded by one of the family members, can play a vital role in protecting the family legacy in line with the overall family plan and long-term objectives. The trust deed should describe these objectives as well as the role the trust will play in achieving them.

Family members can be the nominated beneficiaries, including the second and subsequent generations and any trusts created for their benefit. The founder can appoint trustees who know the family dynamics and the individual family members, including their preferences (and even their vices). It is, however, important to also appoint an independent trustee with the necessary skill to manage trust affairs.

Alongside these trustees, individuals can be appointed from the team of family advisers, which usually include an accountant, family lawyer, portfolio manager, wealth manager, fiduciary specialist and tax adviser. They can ensure that the family plan is executed over generations, and that everyone involved understands the family’s long-term objectives.

Factors that need to be considered include: 

  • the family value system;
  • financial literacy of the family members;
  • the family history;
  • building the family legacy; and
  • philanthropic intent.

Trustees to represent the next generation, who can be one or more of the founder’s children, can be named in the founder’s will, or in the trust deed. The family advisers should ensure the children receive trustee training and understand the nature and workings of a discretionary trust.

About the author: Christine Bornman is fiduciary and tax specialist at Sanlam Private Wealth. Picture: SUPPLIED
About the author: Christine Bornman is fiduciary and tax specialist at Sanlam Private Wealth. Picture: SUPPLIED

For the trust to continue into perpetuity and not terminated by the second generation due to family dynamics, these aspects need to be taken into account:

  • Do each of the children understand their role in the family?
  • Are there family members with special needs?
  • What stumbling blocks do the family members foresee?
  • Are the children prepared to take accountability? 
  • Is there a need for a life or business coach? 
  • The future plans of the children: for example, do they plan to work or live abroad?
  • The needs of the grandchildren (the third generation).

The advantages of setting up a discretionary trust include:

  • The family wealth will be vested in the trust and will no longer belong to the founder.
  • The trust assets won’t form part of the founder’s estate for the purposes of estate duty and capital gains tax.
  • The trust assets won’t be bequeathed to individual family members to do with as they wish.
  • The board of trustees will be able to look after the welfare of subsequent generations by using trust income and capital to their benefit.

If you need assistance with any of the above, including trustee training, contact Christine Bornman at christineb@privatewealth.sanlam.co.za.

This article was paid for by Sanlam Private Wealth.

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