$3.5 trillion is set to be transferred across generations of Australian families over the next 20 years, based on Productivity Commission research. The mechanics of the transfer will be relatively straightforward 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 isn’t 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 series ‘Succession’ unpacks the complexities of transitioning a $25 billion family-run media juggernaut. For those who haven’t watched it yet, we’d highly recommend it, as it’s easily one of the most entertaining depictions of family succession planning you’ll come across. However, most people can’t relate to the fictitious ‘Roy’ family and their escapades. So instead, we’ve mapped out a few considerations 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 you may not be aware of.
There is no set age these conversations should occur, as it depends on a number of factors including maturity, emotional intelligence and stage of life. However, throughout our 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 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 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 provides a solid foundation to begin the financial education process, whether formally or through casual family discussions. Begin with the basics of good savings habits, 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 earned through effort or responsibility. This can be difficult for affluent families, who often want to strike a balance between looking out for their children and letting them go through the necessary struggles everyone needs 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 heightens 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: matching the amount saved for a house deposit or new car, for example, rather than just gifting the money outright.
Does Australia Have an Inheritance Tax?
No. Unlike the US or UK, Australia has had no formal inheritance tax or estate duty since 1979. That doesn’t mean a wealth transfer happens without cost, though. Depending on how assets are structured, capital gains tax, superannuation death benefits tax, and stamp duty can all apply during or after the transfer. This is exactly why the “mechanics” of a transfer and the tax outcome of a transfer are two different conversations, and why getting professional advice on structuring matters more than the headline absence of a formal inheritance tax.
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 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 prevent misunderstandings and conflict later on.
How to Work With a Financial Adviser on Wealth Transfer
The transfer of wealth is about far more than the passing down of assets. It’s about imparting values, knowledge and responsibility to future generations, so they are empowered to make smart financial decisions. Our role in this process isn’t limited to the paperwork. We coordinate our estate planning services with your accountant and lawyer, structure the transfer to manage the tax outcomes above, and help facilitate the family conversations that make the difference between a smooth transition and a difficult one.
If you have any questions about this article or need assistance planning for a wealth transfer, speak with our advisers, or learn more about our wealth management team.
This article contains general information only and does not constitute personal financial advice. Your circumstances are unique. Speak to a qualified adviser before making financial decisions.
