Managing risk in intergenerational wealth transfer

By 2050, $3.5 trillion in wealth cultivated by the baby boomer generation will be passed on to their children and grandchildren. This has been labelled the ‘great wealth transfer’, and while some of this wealth may be eroded by rising costs of living and aged care costs, a significant sum will be passed down in the decades to come.

With this transfer already underway, those transferring their wealth must understand how to manage risk.

At Apt, we specialise in intergenerational wealth transfer, working with countless families to plan and enact it. So today, I want to share some insights we’ve gained along the way.

Failing to plan leaves you open to significant risk 

When discussing the risks, market volatility is often the first thing that comes to mind. And, of course, it will always be a risk. However, in our experience, the most significant risks stem from failing to plan and structure the transfer.  Here are just some of the things that can and often do happen with insufficient planning:

• Mismanagement and, ultimately, loss of assets: Without a clear structure and plan, those inheriting the wealth might not have the knowledge or skills to manage the assets effectively, leading to mismanagement and potential loss.
• Inefficient distribution: Without a proper estate plan, your assets could be tied up in probate for an extended period, delaying the transfer to beneficiaries.
• Unexpected liabilities: Failing to prepare for liabilities, such as debts or other financial obligations, can result in unexpected burdens on the next generation, potentially forcing the sale of inherited assets.
• Values misalignment: Without a well-communicated plan, the distribution and handling of wealth might not align with the family’s values, potentially disrupting long-term philanthropic goals or family business continuity.
• Family conflict: Wealth can often become a source of conflict, especially when there is a lack of clarity on the distribution of assets. This can lead to disputes among family members, strained relationships or even legal battles. And then the only winners are the lawyers.

Clarifying the family wealth mandate

A critical step in ensuring a smooth wealth transition across generations involves documenting family values, objectives, philanthropy and governance principles. We always stress the importance of putting these in writing.

This practice not only solidifies the family’s wealth mandate but also prepares the next generation for the responsibility that comes with wealth. The earlier you do this, the better, as it will set the tone and ensure everyone is on the same page in future discussions.

Engaging in transparent dialogue

Maintaining ongoing and open discussions about the family’s financial situation, potential challenges and collective goals is key. It’s also vital to be transparent about estate plans, trusts and the rationale behind them. If you don’t explain your reasons, family members will usually fill in the gaps themselves, often leading to incorrect assumptions that only serve to increase tension.

Encourage participation and input

Invite contributions and ideas from the next generation regarding wealth management, philanthropy and other family initiatives. This involvement can foster a sense of ownership, accountability and engagement.

Make opportunities to educate those who will be inheriting wealth about financial management, investments and the responsibilities that come with wealth. This will give them a solid foundation to manage, protect and grow your hard-earned money for generations to come.

Establish regular family meetings

Conduct regular, structured family meetings to discuss wealth management, values and future planning. Full transparency and ongoing information sharing are critical. Typically, what comes out in the initial discussions is only the tip of the iceberg, and it takes time and often external support to get everything out on the table.

Involve experts

Consider involving your financial adviser in discussions to provide professional insights and mediate when necessary. It’s something we do regularly for our clients, and it can help to defuse emotions and tease out underlying issues early.

It can also help to get everyone heard. In most family dynamics, there are those who are more vocal or dominant and, often, when the family approaches it alone, these are the members who control the discussion and, ultimately, the outcome.

Initiate discussions early

Don’t wait until a family leader’s incapacity or death to start the wealth transfer process. Begin outlining succession plans and engage the next generation early to maintain continuity, address potential disputes and ensure everyone has a clear understanding of your intentions and reasons.  You can’t rule from the grave, so this is your chance to ensure the wealth you have built has an enduring legacy.

There are several strategies you can apply to maximise outcomes and tax efficiency in intergenerational wealth transfer. It’s essential to work with financial, legal and tax professionals who understand your specific finances, circumstances, family dynamics and goals to define the best approach for you. However, there are some universal truths, particularly when it comes to communication.

Looking for advice on how to navigate family wealth transfer? Our expert financial advisers can help. As well as having expertise in general intergenerational wealth transfer, we are also specialists in business and farm succession planning. Contact us today to find out more.

General Advice warning

The information provided in this blog does not constitute financial product advice. The information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. Apt Wealth Partners (AFSL and ACL 436121 ABN 49 159 583 847) and Apt Wealth Home Loans (powered by Smartline ACL 385325) recommends that you obtain professional advice before making any decision in relation to your particular requirements or circumstances.