Passing on wealth to the next generation

Wealth is a resource, a tangible or intangible good that generates income or has an income generating potential with the ability of making people better-off. Wealth is passed from generation to generation with the hope that, custodians of these passed on assets would preserve them and in turn pass them on to the next generation.

Parents and guardians take pride in leaving a legacy to their children or wards which ranges from cash, precious minerals, houses, shares and so on. Inasmuch as passing on wealth to family is important, all could be easily squandered away without valuable lessons on prudent investing. It is therefore important that heirs or custodians are well informed and educated.

Narrowing down to financial assets, there are different types of investment available to willing investors ranging from cash, stocks, bonds, treasury bills and notes, real estate, mutual funds and similar products. All these have positive and negative ideas attached to them.

Cash is the most liquid asset, but it lacks the ability to self-generate returns unless invested and could easily be devalued by inflation when not put in good investment especially in this era of global economic plunge.

Stocks are claims of ownership on a company with an appreciable degree of volatility. The riskiness of stocks are fueled by sentiments of market participants which is not ideal for risk averse investors looking for normal returns coupled with very low risk.

However, over time, stocks tend to outperform investments and this compensates for the shocks experienced over the volatile periods through dividend payout and capital appreciation.

Keeping wealth in bonds affords the investor regular inflow of cash in the form of coupons which are mostly tax free but compared with other investment vehicles, returns from bonds are relatively lower.

In our part of the world, properties appreciate much faster as real estate development has taken off informing investments such as Real Estate Investment Trusts (REITS). Thus putting wealth in property is rewarding. It however has its unique challenges such as property tax, bunch of legal procedures and maintenance cost which is mostly on the high side.

The most ideal way of planning the succession of a family’s wealth is through professional wealth structuring. Most people contract financial institutions such as banks and asset management firms to help them execute a good succession plan. Another useful way to manage and keep an inheritance in the family for the next two or three generations is to “place your trust in trusts”.

Trusts represent a clever way of shielding one’s assets from taxes such as Real Estate Tax. Trusts hold certain rules as to how beneficiaries can access funds which deters imprudent family spending.

In this age of increasingly complicated financial affairs and complex family dynamics, it is pertinent to put up a will that spells out clearly who gets what after one dies. Only three in 10 Ghanaians according to surveys, have wills and testaments. The absence of wills and testaments greatly affect the passing down of wealth to generations.

Regardless of the form of investment, it is important that people teach their children proper budgeting and investment practices to avoid the erosion of a family’s hard-earned wealth in a blink of an eye as a result of one reckless investment decision.

By Alex Asiedu, MD of STANLIB Ghana Limited

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