Anyone who started life with very few financial means, or with a large debt burden, will want to make sure their children have a better start in life than they did. This episode is all about generational wealth. Generational wealth is an asset (which could be property, cash, shares, or a business) that is passed down from one generation to the next. The theory behind building generational wealth is easy: acquire assets that you don’t intend to spend in retirement and pass these on to your children when you die.
In practice this is much harder to achieve. It requires discipline and sacrifice. Unfortunately sometimes these sacrifices extend to spending long hours away from your family in order to build wealth. Even if you do achieve the goal of creating intergenerational wealth, often the inheritance is finished by the third generation. We discuss examples such as the British Royal Family, Warren Buffet and a local example, the Oppenheimer family. If you plan to leave a large inheritance that could last a few generations, it is important to remember that your heirs should have a strong sense of purpose to fulfil. Equally important is that your children should understand their privilege and have a sense of social responsibility.
However, your goal doesn't need to be to pass on millions to the next generation. You can start with a small amount, saved monthly and compounded over a very long time, such as 50 years. This can be put aside for the education of your grandchildren, or something else that is important to you.
If you decide to do this, you can place the money into a trust, or company, managed by others, and with a clearly documented constitution. It is important that the constitution, or principles, of this trust is known by all members of the family. Be crystal clear about what you hope the money you leave will achieve for your heirs. Transparency is extremely important. In fact, it is so important that Warren says the family should know the goals of the trust fund by heart.
Also remember that there are other legacies you can leave your children: wonderful childhood memories, a good education, soft skills such as resilience or resourcefulness and good personal financial management discipline. These are just as important. You may choose to spend time with your children above leaving them a financial legacy. Each family will make a different choice, but remember that as Ray Dalio says, “I learned that if you work hard and creatively, you can have just about anything you want, but not everything you want.”
Disclaimer: Old Mutual Life Assurance Company (South Africa) Limited is a Licensed Financial Service Provider. This material is not intended as and does not constitute financial advice or any other advice and is neither exhaustive nor prescriptive. It does not take into account your personal financial circumstances. Your financial adviser will assess your financial situation and needs and assist you to draw up a plan to help you achieve your financial goals. The views expressed by the contributor are his or her own (as an independently registered financial services provider, financial adviser or other independent capacity), and not necessarily endorsed by Old Mutual (as a separate financial services provider).
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