Over the next 20 years, we will see the biggest transfer of global wealth from older generations to successors. In Africa, this includes transfers from first-generation wealth creators, such as entrepreneurs, to children and grandchildren.
Succession planning is essential to ensure a smooth transition of assets from one generation to the next. This includes preparation for the transfer of wealth, business benefits and other assets to future generations. In Africa, where family ties and heritage play an important role, an effective succession plan is not only about maintaining wealth, but also about maintaining family harmony and heritage. This is more important given the increase in wealth across the region, the importance of family business and assets, and usually spans multiple countries. Planning ahead will not only help reduce potential tax obligations, but it can also manage the risk of family conflicts surrounding inheritance of family wealth and ensure that assets flow in order. There are many possible strategies that can be used, each with its own advantages.
Cross-border complexity
Many African families diversify their assets internationally. If assets span multiple jurisdictions, it is important to understand the tax liabilities that may arise in connection with those assets when handed over to successors. The legal framework for passing assets is also very important, with a wide range of national laws regarding inheritance, will and trusts.
Securing your will is the basis for a neat and easy way to pass through personal held assets and ensure that your wealth is distributed according to your wishes.
Trusts can be established to manage and protect assets, providing a structured way to transfer wealth to minimize the risk of family conflict. They are important tools for protecting assets from political and economic instability, which could be an important consideration for African families.
In particular, trusts allow the continued ownership of underlying assets to be unaffected by family passage, and ownership of those assets remains integrated, avoiding the fragmentation of ownership that occurs when assets such as corporations are transferred to successors. The need for probate has been avoided, and this is especially valuable when assets span multiple jurisdictions.
A sophisticated trust structure can also provide the scope for younger generations to be involved in retaining and operating family wealth. This is an important consideration for African families where wealth may die from the first generation wealth creator to the next. Flexibility can be incorporated into the structure, allowing set roles (the person who creates the trust) to remain involved in the trust, for example by authorizing the addition and removal of beneficiaries or specific distributions, and having the authority to appoint and remove trustees. Although the trustee has the discretion to administer the trust fund, the set role allows you to set a vision of how the trustee will use the trust to take into consideration when administering the trust.
Similarly, or alternatively, ownership of assets can be consolidated in the holding company. This can also be useful if you have cross-border investments or returns that you have to pass separately otherwise.
Family offices are also established by wealthy families to manage financial and personal relationships and intergenerational wealth.
Business Inheritance
Sadly, statistics show that many family businesses failed in the third generation. It is important for family businesses to have succession plans to prevent this and ensure that the business continues to grow. This includes identifying the right successor, having open conversations with families involved in the business about this, and establishing a governance structure to support the business in the long run. Shareholder agreements can be used to regulate relationships between shareholders, defining, for example, what should happen if a family member wants to close the business.
Wealthy families should consider their values, vision, family culture and their hopes for future impact. How family wealth should be used to benefit past generations, the potential impact that families have on society, and the values for family and business decisions should all be fed on the meaning of family heritage to coordinate their long-term purpose and succession plans. This allows for the creation of family constitutions and charity goals, ensuring that the younger generation is more enthusiastic, committed and prepared for future inheritance.
Family communication and engagement with the younger generation
As explained, it is important to discuss succession plans with your family to prevent future conflicts and misunderstandings. Succession planning is the transfer of assets, as well as preparing the next generation to continue to manage the wealth of a family. Educating and mentoring that generation is essential.
Given the complexity of succession planning, families should consult with experienced advisors who can provide bespoke solutions to reflect the family's unique circumstances, values and goals. Professional advisors can also play a role in enabling difficult family conversations to take place. It is important to review existing plans already in place and update them as needed to reflect changes in assets, family circumstances, tax exposure and legal requirements.
Effective succession planning is essential for African families to protect their wealth and ensure a smooth transition of assets to future generations. By understanding the legal framework for families involved, preparing the next generation and seeking professional advice, African families can continue to pass wealth in a protected, orderly manner and benefit future members of their families.
