Why wealthy families need one coordinated financial plan

As wealth grows, financial planning normally becomes more complicated.

A family may have investments with different providers, retirement funds, properties, a business, a trust, life insurance and money offshore. They may also have an accountant, attorney, trustee, investment adviser and other specialists.

Each part may be managed properly on its own. The problem is that nobody is looking at whether all the parts still work together.

Many successful families do not have a lack of investments. They have a lack of coordination.

Good decisions can still create a poor overall plan

It is possible to make several reasonable financial decisions and still end up with an unsuitable overall structure.

For example:

• Your investment portfolio may be appropriate, but not provide enough cash when you retire.
• Your trust may own valuable assets, but no longer have a clear purpose.
• Your will may say one thing, while your beneficiary nominations say something else.
• Your offshore investments may be well managed, but not properly considered in your estate plan.
• Your business may be your largest asset, but have no clear succession plan.
• You may have several investment portfolios that hold almost the same underlying assets.

The problem is not necessarily that one adviser made a bad recommendation. The problem is that each decision was made separately.

The structure in which an asset is held matters

An investment should not be considered only according to its expected return. You must also consider who owns it, how it will be taxed, when the money may be needed and what happens to it when the owner dies.

For the 2027 South African tax year, the maximum individual income-tax rate is 45%. Companies are generally taxed at 27%, while ordinary trusts are taxed at 45%. The maximum effective capital-gains-tax rates are currently 18% for individuals and special trusts, 21.6% for companies and 36% for ordinary trusts.

This does not mean that the lowest tax rate should automatically determine where an investment is held. Tax is only one part of the decision.

Control, access, asset protection, estate planning, administration costs and the purpose of the structure also matter.

A trust can be valuable where it has a proper family, ownership or succession purpose. It can also become expensive and difficult to manage when it exists only because someone once said that every wealthy family needs one.

Your investment plan and estate plan must speak to each other

A person can be wealthy on paper but leave their family with a serious cash-flow problem after death.

When a person dies, their deceased estate is generally frozen. Nobody may simply withdraw money from the deceased’s bank accounts or deal with estate assets without the required authority from the Master of the High Court. This can create difficulty for a surviving spouse or family that relied on those accounts.

A coordinated plan should therefore consider:

• Where the family will obtain immediate cash
• Which debts and taxes may become payable
• Whether assets may have to be sold
• Who will manage the business
• Whether life insurance provides the right amount of liquidity
• How assets will pass to the intended people
• Whether the family understands the plan

South African estate duty is currently charged at 20% on the first R30 million of a dutiable estate and 25% on the amount above R30 million. A basic R3.5 million deduction applies, together with certain other deductions.

The goal is not simply to avoid estate duty. The goal is to make sure that the family has enough liquidity, that the correct people receive the correct assets and that the plan can be implemented in practice.

Offshore investments are still part of your South African plan

Investing offshore does not mean that the asset sits outside your financial plan.

South Africa has a residence-based tax system. South African tax residents are generally taxed on their worldwide income, subject to specific exemptions and relief for certain foreign taxes.

Offshore investments may also affect:

• Your estate plan
• The administration of your estate
• Your tax returns
• Your family’s access to the money
• The currency in which future expenses will be paid
• Whether a foreign will or other specialist planning is needed

The investment decision, ownership structure, tax position and estate consequences should therefore be considered together.

Compliance can no longer be treated as an afterthought

Companies and trusts now face greater beneficial-ownership reporting requirements.

Companies and close corporations generally need to submit beneficial-ownership declarations with their annual returns and keep their information updated. Trustees are also required to keep and lodge beneficial-ownership information with the Master of the High Court.

A structure that is not properly administered can become a risk rather than a benefit.

It is not enough to create a company or trust. The records, resolutions, tax returns, financial statements and beneficial-ownership information must remain current.

What should one coordinated financial plan provide?

A proper plan should give the family a clear view of:

1. What they own and what they owe
2. Who owns each asset and why
3. How their wealth is divided between South Africa and offshore markets
4. Whether they have enough accessible cash
5. What risks could damage the family’s position
6. How tax affects the different structures
7. What happens if a key family member dies or becomes unable to act
8. How the business or assets will pass to the next generation
9. Which professionals are responsible for each part of the plan
10. What must be reviewed or changed over time

The purpose is not to create a large document that nobody reads. It is to create clarity.

Wealth becomes more useful when the family understands it, the structures have a clear purpose and the different advisers are working towards the same outcome.

If your investments, trusts, business interests, estate plan and offshore assets have been handled separately, it may be time to bring them together into one coordinated plan.

This article provides general information and does not constitute personal financial, tax or legal advice. The correct approach depends on your circumstances and should be considered with suitably qualified professionals.