Financially Speaking September 2009

There is so much more to life than the problems we allow to penetrate our thinking

Dear Client,

After three or four (I forget, time goes too fast) years at our current office address, I am moving again for a time of a different experience. As of Monday the 28th September – next week – we will be at:

Struan Offices
43 Albany Rd

Telephone number: 033 344-1109. Our fax number should stay the same as it is to computer.

When you phone, ask for my offices, me, Sylvia, Adrienne, whatever. There are only 3 businesses and 7 people in the ‘house office’. For those of you that once visited me at my ‘Home Office’, this house is 3 doors down the road. I am sharing with a property developer – his wife is the landlord – and another financial advisor.

My topic in this issue is Generational Wealth. An issue that I recently debated at length with a couple of colleagues. We had got together to do just this around a DVD that one guy had got hold of. Leaving wealth for your/our/my children’s children. That’s the concept. A few thoughts here from myself or that came out of our discussion:

I think this is a topic that is worth talking about. One of the biggest stresses many of us have in life is paying off debt. This so-called recession, or crisis; we are experiencing the very issues that come out of a credit sponsored consumer spending spree. Not a savings driven consumer spending spree. If we could manage to teach our children and our children’s children to reduce debt and then not to leverage it again for consumer spending and lifestyle ‘assets’, which are really lifestyle liabilities, how much better off could they be?

This used to happen, I suppose, to a degree, when the next generation of a family simply stayed on in the family home (upstairs/outside/inside), or the family cave, and then took it over. Now-a-days we all want to live independently in our own spaces and homes. I am not suggesting to change this, no not at all. That’s not going to happen. But what could be done is more to promote generational wealth. You see, when I NEED my inheritance form my parent (if they have any to leave me), however big or small that might be, I should already have paid off much of my home and other debt should be a significant way down the road so that my own retirement savings is growing. This is because if one considers that the patriarch and matriarch of a family unit might die at 70 or 80 or 90 years old, I, speaking as an example of the next generation down, might already be 40 or 50 or 60 years old. Even close to retirement!! So, what do we look at that might be a feasible option? And we have to start somewhere, because I don’t know where my grandparent’s wealth (if there was any) has gone, so we can’t just assume that this system is already in play everywhere!! (‘cause one of you is going to have something to say about that.)

Well, when we as a group were discussing it, we realized that most of us leave everything to our children in our wills. So the 50 or 60 year old inherits when they should no longer really be in need of it. They keep it until they die and leave it in their will to the next 50 year old, etc. Somewhere the chain would need to be broken and the wealth must skip a generation. It must go to the next level, but with a BUT: We need a ruling from the grave as to how it’s spent! But you’re not allowed to rule from the grave, the Master of the Court will say. Which means you cannot leave money in your will to your grandchild and say how it’s to be spent. This means that maybe the wealth could be controlled through a trust structure. There are some issues here. The wealth would need to be left to a Testamentary Trust via a will; in some ways easier than donations over the years. Then the trust deed and trustees could allow the wealth to buy and own a house, maybe. Then that house is sold on and the wealth stays in trust for the next generation. So the wealth is in trust for each generation to own a residential property without debt. So you have each generation funding the second one down and another problem is a growing family tree so greater spread of wealth. But maybe you’ve also got each generation adding wealth to the trust/s on death.

There is lots of other detail around the creation, maintenance and trusteeship of this structure. Lots of noise here but it might work.

But then it came to me the other day: Client’s receiving an income through an annuity like through Marriott’s living annuity called a Perpetual Annuity; these things can run from generation to generation. So the successive wealth could be in the form of continuous income. When old person dies, the beneficiary of the annuity elects to have it continue, which means the capital stays in tact and the generations share an income. Problems are that there are potentially more than one grandchild on this system. The income would help fund the debt payments of everyone who should benefit from it. When their debt is paid, the income re-invests again. If the capital of the annuity is liquidated / cashed in by the beneficiary, they could divide it up to use for house debt settlement. But then who owns it if we are trying to ensure it passes on again. You see, another very real problem is that the ‘grandchild’ who got their house paid off; if they own the house in their own name, chances are that they will borrow against the house for lifestyle luxuries or new kitchen tops, instead of saving money. This messes with the idea.

I have a Testamentary Trust instructed in my will, with the trustee already named, and willing, who is not family member and he would be able to do this for me. Must run it by him…..

This was just my thoughts. Many of you might have additional suggestions for me to add to this line of thinking. Feel free to offer them.

Until next time

Please note that all the views expressed in this publication are based on my opinion and no action or advice is implied or intended.