Over the next decade the world will experience the greatest ever wealth transfer between generations as Baby Boomers, the richest generation in history, push into the later stages of life.

According to the Federal Reserve, Baby Boomers in the United States alone hold US$67.56 trillion in wealth - that’s more than ten times the amount held by a comparative number of Millennials (US$6.5 trillion). In Australia, it is estimated that AU$3.5 trillion in wealth will be transferred from the Baby Boomers to their Millennial children and also their grandchildren over the next two decades, that’s an average of $320,000 per person.

This raises a range of issues and here are a few things to consider in preparing for the safe transfer of wealth to the next generation.

Build solid foundations

Starting at almost any age, parents and grandparents can set their children or grandchildren up for financial success. The most important building block is in helping individuals develop financial literacy which will equip them with the skills and knowledge to understand and manage money at any age, as well as successfully deal with any future inheritance they may receive.

This might involve teaching younger generations lessons on the value of money, having them earn pocket money for chores, save for things they want or as they get older get a part-time job, understand budgeting, compounding or maybe even how to invest.

It’s never too late to build your financial knowledge and expertise but irrespective seeking professional advice from a financial adviser for the responsibilities that come with an inheritance, particularly a sizable one, remains important.

Make a plan

While it can be difficult to think about, it is important to put in place a documented plan for the transfer of wealth after you have passed. This is especially critical for people who have more complicated wealth, tax or personal circumstances, such as owning a business, having large investment portfolios, overseas investments or even just having a blended family.

A will documents who your beneficiaries will be and what they will receive. An estate plan considers additional issues such as tax implications, what happens to life insurance payouts, and how your superannuation is passed on.

Preparing a will with an estate plan to back it up (with proper legal advice and possibly financial advice) ensures your assets go to the people you intend, in the way you intend. It can also ease the burden on your loved ones of administering your affairs after you have passed away, may protect them from unnecessary costs and any potential legal wrangling if your wishes are challenged.

Matters of trust

Transferring assets directly to beneficiaries may be the simplest option of transferring wealth, but some people find it useful to establish a trust in their will.

A testamentary trust provides control over who manages inherited money. This may be particularly useful if the recipient is someone who is unable to manage the inheritance themselves such as a young child or a person with a disability.

A testamentary trust may also ensure the inheritance stays with the intended recipient if that person becomes bankrupt, gets divorced, or has a negligence claim made against them in their professional practice. There are usually also a range of tax considerations with trusts which means getting professional advice is important.

Super benefits

Superannuation needs special consideration in any wealth transfer plan.

Superannuation, including self-managed superannuation, does not automatically form part of an estate. Typically, the trustees of a super fund decide who should receive the money in a fund when the beneficiaries pass on.

An individual can direct their super fund to pass any such funds to specific individuals by making a binding death benefit nomination (BDBN). There are several kinds of BDBNs. Some need to be renewed while others are non-lapsing. Some allow the heirs to receive a lump sum payout, while others will pay their beneficiaries an income stream, known as a reversionary pension. Each option has tax implications, and some may only be available in certain situations, so engaging suitable advisers is imperative.

For those who have a self-managed superannuation fund (SMSF), the process for passing assets on to other members of the fund may be more streamlined but this does depend on how the SMSF has been set up. In June 2021, new rules came into play allowing SMSFs to have up to six members (previously the limit was four). This gives more families the flexibility to include more people in their fund which can help facilitate the transfer of wealth between the SMSF members.

Review and improve

It’s worth reviewing your will and estate plan every few years, or as your family or personal situation evolves. If you welcome a new grandchild to the family for example, you might want to consider updating your estate plan to include that child as a beneficiary. Maintaining an up-to-date plan for how your wealth will be passed on allows you to provide in the best way possible for the people and causes you care about most.

Cromwell is not authorised or registered to provide tax or accounting advice. This article has been prepared for information purposes only and is not intended to provide and should not be relied upon for tax or accounting advice. We recommend you seek advice from a qualified and registered (where applicable) professional adviser before making any financial or purchase decision.
The information in this article is not legal advice, nor is it intended to be used as a substitute for obtaining independent professional advice. Please consult your legal practitioner, professional adviser or the relevant government or statutory authorities before making any decisions.