The younger generation as owners and estate trustees
ALL ABOUT TRUSTS:
By Phia van der Spuy
When Dubai’s founding father, Sheikh Rashid, was asked about the future of Dubai, he said: “My grandfather was on a camel, my father on a camel, I drive a Mercedes, my son drives. a Land Rover, his son will drive a Land Rover, but his son will ride a camel …
The South African National Youth Commission Act 1996 defines “young people” as persons between the ages of 14 and 35. This group constitutes over a third of South Africa’s population (34.7%).
In the United States, Millennials (people in their mid-20s to 40s) control only 7% of the wealth. At a similar age, baby boomers (now in their late 50s and 75s) controlled 21% of the wealth. Only 11% of Millennials have a ‘relatively high level’ of financial literacy, while 28% were rated ‘very low’.
The largest wealth transfer ever, of $ 30 trillion (400 trillion rand) over the next two decades, mostly from baby boomers, who have controlled 50% of the wealth in the 20s. years, passed on to the younger generations, will have an impact on the world of heritage management, preservation (and use). Is this generation financially educated and able to manage such a gigantic transfer of wealth?
Sheikh Rashid’s words should serve as a warning. Millennials, who are the largest, most educated, highest paid but poorest group, are characterized by consumerism fueled by debt and, due to job change, have not sufficiently funded their retirement, because they cash in their savings for moving work. The notion of “instant gratification” seems to be embraced by the younger generation. All of these factors have a significant impact on the preservation, management and disposition of wealth in the future, which will also have an impact on vehicles of wealth creation and preservation such as trusts. It is clear that different generations think about wealth differently.
The purpose of the trust
From the statistics above, it appears that there may be more reliance on trust funds in the future for the maintenance of trust beneficiaries, compared to the “savings” mentality of the baby. boomers. This generation in South Africa was, in most cases, the founders of the typical family trust – a conservative generation.
Often in South Africa, landowners were told that they could not be the founder, trustee and beneficiary of a trust, and they often ended up acting only as the founder and / or trustee. trusts created by them. This created a problem in case they planned to use trust funds in subsequent years for their upkeep.
It is important to remember that you can only benefit from a trust if you are a beneficiary. In the United States, about 19% of baby boomers believe they don’t want their children to inherit. If you are not a beneficiary, the only way to get money from the trust is to receive a donation from the trust (if the trust deed allows) or if your children (as beneficiaries) receive the money and then give it to you. However, in either case, it will attract the 20-25% donation tax. Estate planners should review their trust deeds and make sure they meet all of their intended purposes.
The new generation trustee
Baby boomer boards seem to be more careful about managing money than younger generation boards, who typically replace outgoing trustees. In many cases, the founder would be one of the first directors. They would have worked hard to accumulate the wealth in the trust in order to protect it and preserve it for their families and future generations. Very few distributions would normally have been made from the trust and instead the wealth would have been accumulated and preserved.
Generally, founders want their children to become trustees of the trust at some point, either during their lifetime or as replacement trustees upon their death. Given the generation gap, this can cause conflicts between the trustees as to how the trust assets should be managed. Younger generations are less willing to invest in traditional investments, such as stocks and bonds, preferring high-risk assets, such as gold and cryptocurrencies. Primary residences, usually occupied by the founder and their spouse owned by the trust, may be ceded and either alternative investments will need to be considered or the “next generation trustee” may want to spend the proceeds.
Particular attention should therefore be paid to the planning of the follow-up of the trustees in the trust deed to ensure that the founder’s objectives are met as stated in the trust deed. It is also advisable to include future follow-up family trustees in the deliberations of the trust from an early age so that they appreciate the sentiment of the founder, as well as the purpose of the trust.
It has been found that most trusts are written off after being passed down for two to three generations. This usually happens when the siblings each want to go their own way after a conflict develops between them and the patriarch or matriarch (the founder) is no longer there. With each generation, the pool of beneficiaries grows, all with their own goals, making it more and more difficult to manage trust, often leading to conflict and the end of trust. The estate planner should be aware of this and plan for this, for example by providing in the trust deed for representation on the board of directors of each of their lineages and the appropriate creation of sub-trusts for each sibling. With the different outlook of the young generation, the objective of preserving the founder’s generational heritage may not be achieved.
Young people as landowners
Several government programs support new youth-owned businesses, and the number of youth-owned businesses is increasing. It’s a known fact that over 90% of business owners close their doors within five to seven years of opening, with bankruptcies scheduled for 2021 at 220 businesses per month and 240 businesses per month for 2022.
It is important for new business owners to properly structure their business in order to protect their personal assets from any business failure. A trust may very well be the solution. Given the harsh tax treatment of paid-up assets transferred into a trust, it may be wise to create a trust before any material wealth is created.
Phia van der Spuy is a Chartered Accountant with a Masters in Taxation and a Registered Trust Practitioner from South Africa, a Master Tax Practitioner (SA), a Trust and Estate Practitioner (TEP) and the founder of Trusteeze, the provider of a trusted solution.