“If money is your hope for independence you will never have it. The only real security that a man will have in this world is a reserve of knowledge, experience, and ability.” – Henry Ford
When Covid 19 hit, it was unexpected and it devastated a lot of families. For me personally it opened my eyes to how easy it is to have something and not have it in a flash. I had to really sit down and think of my family matters. For me this begged the question, how do i set up the next generations for success. This led to researching more on what intergenerational wealth transfer really is and how to get a system going.
The finance industry doesn’t want to talk to younger generations about money. The looming handover of wealth is the $68.5 trillion reason you should. It has been projected that in the next 2 decades, the baby boomers are estimated to transfer about $68 trillion to genX and genY. Though this is a lot of money being passed down, not everyone is fortunate enough to have someone pass down anything to them. This then makes most people the 1st in their family line to actually set up the future generations with wealth.
It is so important for people to have a plan in place before stepping into their parents’ or grandparents’ shoes, and why benefactors should be keen to ensure their descendants don’t slip and fall. Whether you are the beneficiary or provider of the wealth transfer likely to occur in your family over the next decades, here’s what the experts advise to avoid a great wealth transfer becoming a tragedy.
Lay it on the table
While the legal structure and tax implications at the time of death and transfer are important, the best way to ensure a wealth transfer is handled smoothly is to have conversations much earlier.
We have this strange idea of inheritance, probably gained from movies and the like, that the conversation starts with the reading of the will. Just because things have been done that way for a century doesn’t mean they should continue to be. Rather than a legalistic approach that leaves the inheritance conversation as a surprise for after death, implement a “living will”. This is an informal conversation within the family that celebrates the hard work that led to the wealth creation and speaks openly about its size and distribution.
What we know is that where there is a really good conversation between the generations of a family about money and what is coming or not coming and what the intentions are, the whole process is a lot smoother. Where it can be an issue is where there is no conversation around it at all and the recipient has no understanding and the money just appears, which can lead to family arguments and disputes and contested estates.
Get the kids up to speed
Once you have children at least 8 years old these informal conversations and in-family education are an important piece of the puzzle when it comes to transferring wealth smoothly. One of the more useful things a parent or benefactor can do is raise their children with a level of financial literacy and understanding of the fundamentals of wealth creation and preservation, so they are better equipped and prepared at the time of inheritance.
Research says that usually recipients in the Gen X and Y demographics are not prepared, but that is starting to change with Gen Z and younger people. Millennials don’t have money hang-ups. They are quite happy talking about how much they’re earning and spending. And kids are learning more about money in school and via fintech solutions. So make it a priority in your family to discuss money and wealth. Personally, my 8 year old son understands how he can make pocket money by doing chores around the house and for the neighbours. This I hope will teach him to value work and how it frames your ability to earn.
This is also an opportunity for the wealth bearer to explain in clear terms what their hopes are for the use of the money, for example to spend it on property or education, rather than holidays or more lifestyle-oriented consumption. While some older people may be culturally awkward about these kinds of open money conversations, I suggest emphasising that it is a way to help ensure they have a say in what their legacy provides. From an African standpoint, money is a taboo subject, it is barely discussed within the confines of a family unit which i believe needs to change.
Declare a constitution
Informal conversations can be helpful, but Credit Suisse advises formalising them in the form of a “family charter or constitution”. This middle-ground measure is a kind of governance document that avoids some of the most common wealth transfer mistakes. Failing to document properly what has been agreed among all family members is a common oversight, as well as ensuring it has sufficient flexibility to deal with unforeseen future outcomes. To make it work, a good family constitution should be a written agreement among family members and several generations should be involved in its formulation. Though it is not a legally binding document, it can inform the legal structures that should also be put in place.
Plan trusts carefully
Rather than leave all your assets in superannuation, or retirement accounts some Australians – particularly wealthier people – have taken steps to establish a legal structure for the specific purpose of transferring wealth to future generations. Often this is in the form of a testamentary trust.
Michael Marr, head of private banking at Credit Suisse Australia, advises that rather than structuring the trust as one central vehicle, which benefactors often like the concept of, they should create sub-trusts for each child or recipient in order to help avoid disputes.
“Separate trusts enable the children to invest differently and in the longer term run their finances independently of their siblings,” Marr says. This is particularly useful when leaving money to Millennials, many of whom have indicated a strong preference for investing in line with personal values and principles, such as environmental, social and governance issues.
The younger generation – typically, though not always – wants to invest the wealth to achieve a purpose, rather than a sole focus on wealth preservation or growth for future generations to enjoy. Some 63 per cent of young investors see the value of working with a professional investment adviser but want the power to make final decisions themselves, partly because of this desire to invest in line with their values, Credit Suisse research shows.
Where there’s a Will
The most important thing is to make sure you have an up-to-date Will that truly reflects your current situation and your wishes. And make sure your family knows where your Will is kept. It’s good to get financial advice as there may be many hurdles and unforeseen consequences. This, I have learned, should be done by EVERYONE who earns an income and has assets, no matter how small. It is good practice to plan how you want your assets distributed in the event you are no longer there. You are never too young to have a Will.
Where I am from, most estate planning issues centre on giving assets evenly among family members. For instance, if one child gets the family home and the other the holiday home then the holiday home beneficiary may feel like they deserved the family home or vice versa.
Asset protection is another area that requires careful planning. You may be worried about an adult child’s inheritance being lost in a divorce settlement or through financial mismanagement, or you may have a disabled child who will need ongoing financial support. One way to protect your assets in such situations is to set up a family trust. Conversely, you may decide that your adult children are already well established and don’t need a large inheritance. With so many young people finding it hard to break into the housing market and repay debt, you might consider bypassing your children and leaving your estate to your grandchildren.
If you have your own business or a farm, then you also need to consider succession planning. Do all or any of your children want to stay in the business? How will you compensate those who don’t? Successful succession planning needs to start early so the next generation can plan their future with some certainty. So do not wait until you are old to start looking at a succession plan, because you run the risk of living a business to someone who doesn’t want to run the business.
A super strategy
If you are the first in your family to create a system of wealth generation and preservation, you need a system that will outlive you. So is it a business, is it an investment portfolio, whatever it is it needs to survive way past you. Strategy becomes key, what you are trying to achieve here is to make sure you have in place a plan that suits you as an individual and your family and their families. I will tell you that, no one plan fits all. As individuals we are unique in what we desire to achieve and our purpose in life is different. The constant though is the fact that you need a system. A classic example is the Barcelona Football Club and their La Masia Academy, it’s a youth project that trains kids from as young as 6 years old to play Tiki-Taka which is a style of play. This system is effective to the point that the 11 players on any Barcelona team move like 1 unit, they are seamless. This is how your strategy for wealth preservation needs to look like, it needs to be fluid that even when you introduce new things into the system iot doesn’t break. When a pandemic like Covid 19 hits, you should still bounce back and continue moving financially, if you get divorced or eventually you die, the system can operate without you.
Future planning is key and very intentional. Your work should outweigh your want, what this means is you have to work like a billionaire if you want to be a millionaire. Go the extra mile. Educate yourself and your family on what is really necessary, you are your biggest assets. And, of course, all of the experts suggest seeing a specialist financial adviser to help navigate a successful family transfer of wealth so you don’t have to resort to robbing banks.
Hope you and yours are safe, share with us your thoughts and questions in the comments section.