If you control your family’s money, you’ll be very aware of the responsibility it brings and not just in terms of financial planning, tax and legal matters. What’s recently become known as intergenerational wealth transfer also needs careful consideration.
Most of us are more familiar with the concept of inheritance than the much bigger intergenerational wealth process.
The latter usually extends well beyond those who may be next in line for family money to include complex decision making affecting the wealth of many generations to come.
In this article we explore SIX fundamentals providing insights about preparing for your family’s wealth transfer.
In September 2021 the Government released a report indicating a colossal $3.5 trillion in wealth was set to transfer from older Australians to their X-Gen and Millennial offspring in the coming 20 years.
Since then another report has been released, this time by Perpetual and it indicates we’re failing miserably at successfully transferring our family wealth from one generation to the next.
According to Perpetual an estimated 70% of families lose their wealth by the second generation, and a whopping 90%, lose it by the third [1].
It stands to reason, those responsible for the stewardship of family money, often have concerns about protecting wealth that has been built over several lifetimes and what becomes of it in future.
1: Sensitive discussions
As you can imagine, navigating the wealth transfer process will likely involve sensitive, and at times, difficult discussions.
If you are a parent or grandparent preparing for wealth transfer, you’ll need to get advice, then talk to your adult children or key beneficiaries (nephews, nieces or other relatives) to convey your plans, and the responsibilities that come with managing and protecting family money.
These discussions may be uncomfortable as issues such as unstable relationships, potential for family court situations and other matters such as illness or addiction that might need special considerations, all need to be addressed.
Similarly, if you’re an adult child of aging parents or grandparents who may be avoiding the inevitable, you’ll need to get them talking. Changes in health and competency can happen without warning, so it’s important to help those who preside over family wealth to clarify their wishes and formalise plans so that instructions can be implemented and wishes honoured when required.
2: Wills
Everyone needs a current will, especially when planning wealth transfer. And, as obvious as it might seem, it’s important to know where the wills are kept.
As a general rule of thumb, wills should be reviewed every couple of years. However, for many people it’s often a case of set and forget…if they have a will at all.
Wills need to be updated for a range of reasons. The most common include getting married or entering a de facto relationship, separating or divorcing, having children, stepchildren or grandchildren, beneficiaries pass away or there are changes to their financial circumstances or yours.
If key family members pass away without a will, the result could be years of financial disruption and family dispute.
3: Trusted representatives
At some stage in life, we will all need to rely on others to make decisions for us when we can’t.
Careful thought should be given to choosing candidates for your power of attorney, executor of your will, trustee of your estate and successor for guiding your family wealth. Your representatives must be trusted, willing as well as capable of making decisions that are in your best interests and those of the family.
4: Estate Planning Trusts
Wills don’t cover everything. Important wealth matters including superannuation and personal and business assets need an estate plan that may include legal structures such as a Testamentary and Super Proceeds trust.
A testamentary trust activates when an individual passes away. This type of trust is discretionary and it protects the individual’s wealth from legal claims while providing the trustees flexibility and options for making decisions about to whom, when and how assets are distributed. This can be particularly relevant for challenging family circumstances when family members may be unable to manage their financial affairs – infant children and those with intellectual disability or dependencies such as drugs and gambling.
Superannuation can make up a significant portion of an estate. A Super Proceeds trust can be established in a will, then in accordance with binding death nomination from the super fund, money can be directed through the estate into the trust where the trustees have discretion when managing those funds.
5: Binding Nominations
Binding Death nominations apply to superannuation and insurance benefit payments. It’s important to regularly review and update them when circumstances change.
6: Death & Taxes
Tax effective financial planning is central to successful wealth transfer. For example, your adult children may have to pay tax when inheriting your superannuation. There are rules affecting the tax-free and taxable components of super and whether it is received by dependants as a lump sum or an income stream must also be considered.
Working in collaboration with your solicitor and financial adviser, steps can be taken and tax-efficient structures established that can help your beneficiaries avoid being taxed unnecessarily.
Next steps…
Here we’ve only scratched the surface of range of matters that have potential to impact family wealth and its transfer to future generations. There will be complexities specific to family circumstances that will need to be worked through in addition to these six fundamentals, so may we suggest you address your family wealth transfer process sooner rather than later.
We’re here to help and not just with the financial planning. We coordinate with and brief legal and tax specialists who will also need to be involved, and guide discussions so that you can confidently pass on the stewardship of your family wealth.
To find out more about financial planning for family wealth transfer or to request a meeting, please contact Matt Lane or Alec Winter on 07 3720 1299 or email admin@wealthfundamentals.com.au.
[2] https://www.ato.gov.au/Individuals/Super/In-detail/Withdrawing-and-using-your-super/Withdrawing-your-super-and-paying-tax/?page=6
Lane Moses Pty Ltd ABN 56 092 186 117 trading as Wealth Fundamentals and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306.
The information (including taxation) contained within this document does not consider your personal circumstances and is of a general nature only - unless otherwise stated. Wealth Fundamentals strongly suggests that you should not act on it without first obtaining professional advice specific to your circumstances. This information is based on our understanding of legislation at the time of writing. Such legislation may be subject to change. This publication cannot be reproduced in any form without the express written consent of the author.