all insights

Planning a successful transfer of wealth

By Jason Chequer |4.10.2024

Taking a positive approach

When contemplating intergenerational transfers, families need to be intentional in their planning, preparation and execution. Families that do this well tend to see the transfer as a gradual process and a multifaceted endeavor that requires both financial and family elements to be addressed along the way.

This article does not focus on what could go wrong, but instead shares some insights and strategies that can help a family constructively distribute its wealth and live and work well together.
With a conscious self-awareness and shared understanding of what the family wealth means to its members and different generations, families can increase the odds of successfully navigating the complexities of wealth transfers (both family and philanthropic).

Are you ready for what’s next?

The amount of wealth being transferred in Australia is large and growing. The 2021 Productivity Commission Report estimates the total value of wealth transferred between 2002 and 2018 at $1.5 trillion and estimates inheritances and gifts could rise four-fold and reach $3.5 trillion between now and 2050.

Inherited assets are predicted to rise from the current $120 billion per annum to $500 billion per annum over the next 25 years. Much of the inherited assets in Australia will come in the form of superannuation and residential property. While wealthier individuals receive more
inheritances and gifts in absolute terms, those with less wealth experience a much larger boost relative to their existing assets.

Wealth for now, wealth for future, wealth for others

For many individual recipients their transfers will be used to pay off debt and support their lifestyles and there is no need for legacy planning ie wealth for future and others.
For those families fortunate enough to have excess financial resources needed to fund their lifetime needs, and even those of the next and future generations, the purpose of the family’s wealth needs to be discovered or understood by each generation.
Before going further, I acknowledge there is a real difference when contemplating a family’s purpose and transfer of the control and ownership of a family business compared to shared financial assets. My role as a family adviser focuses more on supporting and advising families seeking to manage wealth together so I won’t specifically discuss how a family can successfully transition business ownership and management.

A legacy of empowerment, not entitlement

Families need to support members to build a healthy and empowered relationship with wealth. No family I know wants their wealth to be a burden on its members or destructive to the family.
When I meet with a successful family in business or with financial wealth, the topic of succession planning consistently comes up. I hear parents who are anxious about entitlement and worry about placing responsibility on their children. They fear the rising generation will not be able to cope well with the wealth and the responsibilities associated with it.

When I sit down with the children and the younger generations, they share concerns of not being able to talk openly about money or wealth with their family. Individuals fear they will ‘mess up’ and often have hidden feelings of guilt inheriting significant wealth they have not created. In some cases there is entitlement behaviours and attitudes but at the other end of the spectrum is denial, where individuals distance themselves from the family wealth and avoid money and succession discussions.

What generation is transferring the wealth matters

Sometimes the wealth transfer decisions are made by one generation on behalf of others, but where the family has built a shared identity or purpose over several generations, these decisions can be more complex as they need to respect the past but also align with the current values and thinking of the family.
The first-generation transition to the second is often the most difficult with the wealth creator often used to making decisions themselves and on behalf of the family, rather than engaging the family across generations. In the case of later transitions, the family has often
established governance and communication frameworks for the family to make decisions on behalf and across generations.

Increasing the odds of a smooth wealth transition

We watch TV shows and read about real families who are fighting over control or ownership of family assets or an estate. What is likely to have gone wrong? In most cases I expect an absence of trust and communication – the breakdown of these are the most significant factors in unsuccessful wealth transfers and family conflicts.
What I have observed in more recent years is an increasing number of founders and current owner generations having thought deeply about business succession and personal estate plans. However, what is most commonly missing is the open communication of the transitions plans with the broader family and not enough education and preparation of the next or rising generations.

Too often the heirs and future recipients of the wealth are either left in the dark or only provided a high-level overview of the legal and financial arrangements that are in place for the transfer of wealth and to transition roles and responsibilities. These approaches to wealth transfers can be cultural but often the family has not been deliberate in nurturing and developing a well-functioning adult family relationship between the generations - where the family can communicate effectively with one another. This takes time, and the families that do this successfully have made a conscious effort to prepare the family itself for intergenerational wealth.
Rather than just hope for the best, someone needs to take responsibility for setting up the beneficiaries for long term success. In practice this can be someone in the family or for larger families or magnitude of wealth, a group of family members, their advisers and the family office will often form part of the support system required to help prepare for the transition of wealth and its future management.

Wealth transfers can be gifts or inheritances

A common misconception is the planning and execution of a wealth transfer is part of the estate planning exercise. When I work with families who identify wealth beyond their own needs, sometimes referred to as legacy or aspirational wealth, they are grappling with “how much” and “when” to pass wealth to family and “what” to allocate to charity or other purposes. It is these choices where the burden and opportunity of wealth comes into picture.

There is no formula for how much might be distributed or when, but in my experience the magnitude of wealth and the extent to which the family wants the wealth to benefit multiple generations, rather than the next generation alone - will be a key determinant.

A good way of working out if the wealth transfer is to be constructive is to think through the impact you expect the gift or inheritance will have on the recipient and is it likely to have a positive impact on them and their family relationships.

Families of wealth will also be trying to understand how, when and what amount of wealth created by the family is to be gifted. In Australia you have the choice of transferring assets to a philanthropic fund (private or public) or giving/pledging money for public or community benefit.

This leads me to the question of “what is a successful wealth transfer?” The obvious answer is where the financial capital of the family is preserved or grows over generations. This is a reasonable answer, but beyond just the financial returns on the family capital, the family will be clear on what it stands for and how the wealth is to be used and managed for the good of the family and its community.

If you wish to ensure the family and the funds survive and prosper over generations, don’t just focus your planning and preparation on the financial, tax and investment strategies but extend your work as a family and with your advisers to the design of a strategy that also addresses the way the family communicates with one another; educates and prepares the next generation for the wealth; and supports the family and its individual members to fulfill their potential and be empowered by the wealth.

By Jason Chequer
Partner & Head of Advice, Sayers Family & Wealth