As grandparents and parents, we each have a stake in Australia’s $3.5 trillion intergenerational wealth transfer* which according to a recent report, will occur over the next couple of decades.
In this article, we consider what you can do now, why it’s important to plan and how even a modest inheritance or financial gift to your family can be life changing for them. How you prepare for your own intergenerational wealth transfer, could be the difference between it being the positive impact you intend or an experience fraught with challenges.
In November 2021 the Government’s Productivity Commission released its research finding on wealth transfer in Australia. The report indicated a staggering $3.5 trillion would move from the Great (World War II) Generation and Baby Boomers to their X-Gen and older Millennial children between now and 2050. While 50-year-olds are set to mostly enjoy inheritances, beneficiaries in their twenties are more likely to benefit from financial gifts.
Whether modest or substantial, an injection of cash can have life changing impacts at any age. Depending on the circumstances of the recipients and possibly the relationships they have with other beneficiaries who will more than likely be other family members, the experience could go either way – very positive or very negative.
Family wealth transfer arrangements will be different for each family, however in our experience there are three things in common for all who aim to achieve positive outcomes for those they love.
1: Plan early
While we’d all like to think we’ll live well into our old age, life has a way of taking unexpected turns. Accidental death, serious illness and debilitating health conditions that diminish our physical and mental capacity for making decisions can affect us at any time. All too often, in the prime of our lives when others are most dependent upon us.
In our experience, it’s never too early and you’re never too young to start planning your future. Leaving it until the eve of your retirement or until you are forced to do it because you’re unwell (which often affects young parents) or not planning at all, can lead to otherwise avoidable difficulties and missed opportunities.
Early and continuous planning provides the chance to discuss all matters affecting your wealth transfer including how to fairly manage sensitive family circumstances.
Fairness is a much-discussed issue. Our clients often worry about keeping the wealth within the family and how to deal with family members who may have challenging situations.
Commonly these concerns relate to family members who may be financially immature or gullible, who are spend-thrifts, have (or potentially have) unstable relationships, gambling problems, substance addiction or are unable to independently manage their financial affairs due to disability or because they are a minor – an infant or child under 18 years.
In our experience, fairness is achieved when clarity and logic prevail to underpin a well-designed plan that synchronises individual wealth transfer goals, financial planning, legal and tax strategies.
2: Involve ALL the stakeholders
In earlier articles, we’ve encouraged parents to talk to their adult kids about the responsibility of family money, and equally we’ve also suggested adult children get their parents talking about their financial affairs.
Talking about money can be awkward at the best of times and adding a conversation about death and what happens then, can be difficult and upsetting.
However, death is inevitable, and these discussions are necessary so that each stakeholder, which may include charitable organisations, are aware of their gift or inheritance as well as any responsibilities or conditions that may need to be met in order to receive it.
Family financials can be complex and typically involve tax and legal matters. It’s important to include your financial adviser, accountant and lawyer in these discussions as well.
For example, should you wish to transfer wealth early (while you’re still alive) it will most likely take the form of a loan, commonly to help a family member to buy a home or business. It’s important to formalise the details in a legal document. Regardless of whether the loan is to be repaid or not, implementing a legally binding agreement is important for keeping the money within the family. A relationship breakdown between the loan recipient and a partner that causes the home or business to be sold could result in family money unintentionally benefiting others. Protecting family money includes formal acknowledgment of your interest by registering a first or second mortgagee over the property and estate planning instructions should the loan provider pass away.
3: Provide financial education
Involving your children in the fundamentals of financial education from any early age is beneficial. As they get older, sharing your wealth experiences, wealth values and your advice network that supports your decision making, will create an appreciation of your family money and will help prepare them for their own successful wealth journey.
For you as the current wealth owners, you’ll feel a greater sense of confidence that your financially educated beneficiaries will be more likely to achieve better outcomes and/or have less risk of your money being mis-spent than if it was bestowed upon those with little or no financial knowledge.
In our experience, a good general understanding of wills and estate planning, the steps for claiming insurance or superannuation entitlements and the purpose of various legal structures that may have been implemented for protecting assets and managing tax obligations, is always recommended. We also suggest conveying the value of your professional advisers and the role qualified advice plays in effectively managing wealth.
As we mentioned at the outset, even a modest financial gift, particularly for a financially inexperienced family member can be life changing and how you prepare them can help them to understand and make the most of the opportunities money can bring.
Next steps…
If you have accumulated additional wealth, perhaps as a result of increased property values, strong returns on investments, business success or sale and you haven’t spoken to your financial adviser about these changes – that’s your first step.
Similarly, if there have been changes in your personal circumstances that may include separation or divorce, illness or injury affecting you directly or someone dependent on you such as your spouse, child or a parent, contact your financial adviser. It’s important to know, these type of changes almost always impact your financial plan and can affect the achievement of your short and long-term financial goals.
If you are aware of the extent of your financial legacy, and you are worried about fairness and executing a seamless transfer of wealth to your next generation, call us and start a conversation.
We can provide the support you need, importantly an ‘arms-length’ voice of reason in what can be emotional considerations to provide clarity for decision making and the financial expertise for implementing a properly structured and logical intergenerational wealth transfer that’s right for you.
To discuss financial planning for your intergenerational wealth transfer, please contact Brett Cribb, Steve Nicholas or James Marshall on +61 (0)7 3007 2007, alternatively please email info@stratusfinancialgroup.com.au, and let’s make it happen.
Stratus Financial Group helps professionals, executives, business owners, families and retirees manage their complex financial affairs and coordinate their professional advisers.
Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. This is general advice only and does not take into account your objectives, financial situation or needs, so you should consider whether the advice is relevant to your personal circumstances. You should also read the relevant Product Disclosure Statements (PDS) before making any financial decisions
Further Reading:
Money matters that need to be discussed with your next gen adults
Three questions about money that can get your parents talking
Living financial Legacies: Giving to X and Y Gen with a warm hand
*Ref: https://www.pc.gov.au/research/completed/wealth-transfers/wealth-transfers.pdf
