What is wealth transfer?
As one generation sadly leaves us, we see a steady flow of wealth cascading down the generations. I’m referring to the concept of inheritance, which occurs after death or as a gift from one generation to another. While many just know this to be an inheritance, really it is the start of the generational wealth transfer.
There have been countless reports, and all have ended up with the same conclusion — there is about to be a massive shift in wealth. How big is this shift? By 2035, the baby boomer generation is expected to pass on an estimated $224 billion each year, creating a $3.5 trillion windfall for many younger generations. This means that we must be thinking about this shift now and how we work with families.
Two important facts to know
- Baby boomers hold enormous sums of wealth
Either love them or hate them, the baby boomers (those aged between 53 to 72) have benefited the most from the greatest property bull markets and the longest bull run in the stock market that Australia has ever seen. Couple that with the recent low-interest rates (well, not so low now) and quantitative easing; this generation has been fortunate to create vast sums of wealth through superannuation, personal investments, and property investments.
- Life expectancy
Australia is really a lucky country. Life expectancy in Australia has now reached 83 which is three more years than the UK and six more years than the US. While this is good news because we have the older generation around for longer, it also means that our senior community is holding onto their assets for longer. This has broader implications when considering estate planning.
How to prepare for the transfer of wealth
So, we know $3.5 trillion is about to start moving down the family tree. Children, grandchildren, and others are going to receive the large bulk of those funds, and the wealth won’t be dripped out to them. We’ve all heard it: “Dad left me some money, and so we went on holiday, bought a new car and gave some money to the kids”. This transfer in wealth will give rise to new opportunities in the accounting, legal and financial planning spaces, but we have to be on the front foot.
All too often, many benefactors haven’t fully thought about, or made thorough plans, for even the most basic generational wealth transfer. Close to 76 per cent of Australians do not have a will in place, and 53 per cent of aging parents have not discussed their will or legacy with their children, despite the nation facing its largest intergenerational wealth transfer. The data came from a survey conducted by Perpetual, where they questioned 3,000 Australians about attitudes towards wealth, inheritance and their families.
In addition, as clients age and approach the end of life, the number of so-called ‘vulnerable clients’ will increase, bringing with them a whole host of new needs and challenges such as Powers of Attorney, Aged Care and end-of-life directives. This is not something that benefactors will think about until the last minute or when they come to that bridge.
Don’t forget inheritance or estate taxes
Yes, there are no inheritance or estate taxes in Australia, but it will only be a matter of time before it comes in. We already see some tax obligations that will be applicable once the asset is inherited.
While there will be no formal inheritance tax, any assets that are sold after they have passed to the benefactor will be liable for capital gains tax (CGT). Additionally, any income derived from inherited assets will need to be included in the tax return. If not properly planned for, receiving these assets, or even holding these assets could create or have an inverse effect on the beneficial tax position. To ensure that we reduce the amount of future taxes liable, it is important to engage with all generations who are going to receive which assets and why.
There is also a little-known death tax that is payable by the benefactor when a superannuation death benefit is paid to a non-financial beneficiary. With the removal of the anti-detriment payment in the 2017 budget, the non-financial beneficiary will have to pay 17 per cent of the amount. So, for example, if a non-financial beneficiary were to receive a $1 million death benefit, they would have to pay $170,000 in taxes, which is a vast sum. There are strategies that can be utilised to mitigate this, but once again, forward planning is essential.
The importance of financial planners, accountants and lawyers in the transfer of generational wealth is obvious. Engaging with inheritors and working with the whole family unit will ensure that the transfer of wealth is smooth and seamless.
Stuart Woodbridge, senior financial adviser, 24kWealth
