$3.5 trillion is set to be transferred across generations of Australian families over the next 20 years. The mechanics of the transfer will be relatively straight forward for those who have made the appropriate estate planning arrangements. However, the complexity doesn’t lie in the disbursement of assets via the inheritance process, it lies in the ongoing stewardship of wealth across different generations.
It’s important to note that there’s not necessarily a ‘right’ way to prepare the next generation for the transfer of wealth, but what we have found over time is that success leaves subtle clues.
HBO’s ‘Succession’ unpacks the complexities of transitioning a $25 billion family-run media juggernaut. For those who haven’t watched it yet, I would highly recommend as it’s easily one of the most entertaining depictions of family succession planning that you will come across. However, most people can’t relate to the fictitious ‘Roy’ family and their escapades. So instead, I’ve mapped out a few considerations that you can start thinking about to help set up your family for success.
Start the conversation
Personal finance and home economics generally aren’t taught in high schools, which leaves most young adults lacking in financial literacy skills when they enter ‘the real world’. The responsibility then sits with family members to have open discussions with the younger generations about money and what it represents.
For many, money represents achievement, responsibility, years of making smart decisions and sacrifice. By creating an open dialogue around money, you can share insights with the next generation about how your family views wealth and uncover any underlying assumptions that you may not be aware of.
There is no set age that these conversations should occur, as it will be dependent on a number of factors including maturity, emotional intelligence and stage of life. However, throughout the years of working with affluent families, we’ve found that the earlier you can start the conversation, the better.
Wealth stewardship
Wealth stewardship is about preparing the next generation for the money that they will receive. One of the best ways to do this comes from leading by example. Children learn a great deal through osmosis, so the more you can demonstrate good financial habits in your own life, the more likely it is that the next generation will follow.
Identify and discuss what your core values are as a family. When you are clear on what motivates your decision making, you will have a better understanding of what you would like your financial goals to be.
This will then provide a solid foundation to begin the financial education process, whether that be formally or through casual family discussions. Begin with the basics of good savings habits, and then progress to more complex topics like the principles of long-term investing and setting up your estate plan. For these types of conversations, it may be useful to work with financial advisers and other professionals who can help make the complex seem a little simpler.
Avoiding the entitlement trap
One of the biggest challenges in transferring wealth between generations is avoiding the entitlement trap. Entitlement occurs when there is an expectation around wealth, privileges or rewards, without it having to be earnt through effort or responsibility. This can be difficult for affluent families, who often want to strike a balance between being there to look out for their children but also letting them go through the necessary struggles that everyone requires to thrive in the adult world.
A useful way to do this is to provide emotional support before providing financial support. Giving people the opportunity to struggle, try, fail and brainstorm solutions on their own is a powerful thing, as it will heighten their sense of accomplishment and resilience when they come through the other side.
That’s not to say there’s anything wrong with providing financial support but consider doing it in a way that promotes the behaviours you want to see. A great way to do this is through ‘matching’ contributions towards financial goals. For example, matching the amount saved for a house deposit or new car, rather than just gifting the money outright.
Estate planning
A comprehensive and well thought through estate plan is the final piece of the puzzle. This process involves drafting all the relevant legal documentation to ensure that wealth is transferred according to your wishes and in a tax-effective manner.
Regularly review your drafted estate plan to ensure it remains appropriate and reflective of your current thinking. Once your children reach a certain age, it may also be useful for them to understand what’s in place, as transparency helps to prevent misunderstandings and conflict later on.
The transfer of wealth is about far more than just the passing down of assets. It’s about imparting values, knowledge and responsibility to future generations, so that they are empowered to make smart financial decisions. If you have any comments or questions about this article, our advisers are always happy to help. Please email us at ask@capital-partners.com.au or give us a call at 6163 6100.
