This is an edited extract from the Professional Planner ‘Guide to advice for high-net-worth clients and family offices’, download the full copy of the guide here.
Over the next 25 years, Australian baby boomers are set to pass on an estimated $224 billion.
This phenomenon, commonly referred to as the great wealth transfer, is underpinning demand for professional financial advice from both benefactors and beneficiaries, as they seek to navigate Australia’s complex superannuation, tax and social security system; orchestrate the efficient transfer of assets; and continue protecting and managing their wealth.
For wealthy individuals and families, the smooth transfer of wealth from one generation to another is a key part of protecting their legacy.
As a result, estate planning and multi-generational advice are fast becoming core components of the advice proposition and important areas of specialisation.
When it comes to estate planning, lawyers are essential for drafting and executing wills and powers of attorney, and ensuring documents are legally sound, but experienced financial advisers can provide expert guidance on strategies to reduce tax liabilities and protect assets from creditors.
Advisers are also extremely knowledgeable about the different investment vehicles that can be used to build, transfer and preserve family wealth.
In time, they can facilitate and oversee the transfer of wealth in accordance with a client’s plans and wishes.
According to research by CoreData, commissioned by Generation Life, children stand to inherit the bulk of wealth from their parents.
Grandchildren are a distant second.
That said, it’s not uncommon for people to skip a generation, particularly as we see a growing interest from grandparents wishing to gift their grandchildren a financial head start in life.
The move by some to place restrictions on beneficiaries or allocate a larger percentage of their wealth to grandchildren or charities is influenced, in part, by higher life expectancy rates and product innovation.
People are living longer and therefore building stronger relationships and connections with grandchildren and great grandchildren.
It’s complicated
In financial planning, complex family dynamics are par for course.
In Australia, around 30 per cent of first marriages end in divorce, 60 per cent of second marriages and north of 60 per cent for third marriages. Where there are children with special needs, the probability of divorce is significantly higher.
Today, one in eight Australian families are blended.
All this adds complexity and increases the likelihood of uneven estate distribution.
Interestingly, nearly two in three affluent and high-net-worth (HNW) individuals plan to transfer wealth while they are still alive, according to CoreData, reflecting both the desire of parents to see their children benefit from their inheritances and also control how their wealth is distributed and spent.
This desire for control, alongside demographic changes, rising levels of household wealth and constant changes to super, highlight the challenges of building and preserving generational wealth.
It also highlights the risk of using super as a vehicle for transferring leftover retirement savings.
Pleasingly, there are an increasing number of options and solutions available to meet the evolving needs of investors.
For example, investment bonds can offer unmatched flexibility, simplicity and certainty for those looking to not only build wealth but preserve and transfer it to future generations.
Investment bonds are tax-paid investments meaning taxes on investment bond earnings are paid by the issuer at its company tax rate of 30 per cent or potentially less, after the benefit of franking credits and other allowances.
Investment bonds can also be used to fund anything, not just retirement. Investors can make a full or partial withdrawal at any time with withdrawals tax-free after 10 years, and transfer bonds to anyone usually without tax implications for them.
If desired, people can bypass a generation with appropriate structuring as a non-estate asset.
When appropriately structured as a creditor-protected, non-estate asset, any challenges to an estate may be funded personally and not by the estate.
This can act as a disincentive for unhappy people to pursue legal action.
Not surprisingly, investment bonds are playing an increasing role in estate planning, particularly among high-net-worth and ultra-high-net-worth individuals and families, given their penchant for ongoing control.
Flexibility, simplicity and certainty
While superannuation is still the most tax-effective way to save for retirement, by design, it is intended to provide funds for retirement.
It is not designed to be a tax-effective vehicle for building and passing on intergenerational wealth.
As Australia’s 4.1 million baby boomers get deeper and deeper into retirement, and the great wealth transfer gathers steam, more families will need professional advice and flexible investment solutions that provide certainty and can help them smoothly and efficiently transfer wealth and preserve their family legacy, whether they’re dead or alive.
Felipe Araujo is chief executive of Generation Life.
