Wealth Transfer: Preparing the Next Generation

June 22, 2022

Intergenerational wealth, on our TV screens at least, conjures images of Succession’s Logan Roy dismissing one of his weasel kids with a sneer and expletive. Roy, the fearsome patriarch, who built his business from nothing, watches in disgust as the heirs to his throne – who do no work of any note - connive and backstab in an effort to win the keys to more money and power.

Thankfully, the average transfer of wealth is a less spiteful affair, but the characters provide lessons into what a family needs to consider when leaving their assets to the next generation. In the real world, there is a monumental wealth shift happening, with US$30 trillion expected to be passed over to 90 million millennials in the next decade alone.

Baby boomers have benefitted from a huge increase in net worth, driven by property values and equity markets, while life expectancy has increased, meaning they’ve also had more time to hold their assets and accumulate wealth.

But before the younger generation rush for an armchair and cigar, the likelihood is a large number of these wealth transfers will fail because of a lack of financial planning, preparation and proper execution. Many families will experience the “shirtsleeves to shirtsleeves in three generations” phenomenon, a phrase that typifies the inability of grandchildren to manage wealth passed down to them from their grandparents and parents.

The Vanderbilts, once the wealthiest family in the U.S., offer a famous example of this generational financial meltdown. When 120 family members gathered for their first family reunion in 1973, none of them had a million dollars to their name. Worryingly, echoes of their failings were found in a 2013 U.S. Trust study of high-net-worth families, which reported that 72 per cent did not have a comprehensive estate plan.

Fail to plan, plan to fail

The majority of people still pass on their assets upon death. The thought process makes sense – you want to ensure you maintain a certain standard of living, while you or family members may also be uncomfortable addressing the topic of death. However, this is often not the most efficient way to pass on the family assets.

The inheritance tax burden alone should suggest a rethink, while probate fees paid by an estate upon death must also be considered. Savvy parents, therefore, might want to look into a “giving while you’re living approach”. For example, opening a Registered Education Savings Plan (RESP) for their children at birth is a tax-sheltered way to save for and invest in their post-secondary education. Once your child hits 18, you can then contribute to their Tax-Free Savings Account (TFSA), and when they’re ready to buy their first home, help with a down payment can give them a leg-up on the property ladder.

Other tax-efficient methods of transferring wealth are to gift money earned on the sale of your home when downsizing, while life insurance is creditor proof, guaranteed and tax free. The family cottage is also a good example of where prudent thinking can help. While Logan Roy may not bother with this given his global portfolio, for a Canadian family looking to preserve wealth, their property is a significant asset. For many older people, a cottage can become a drain on resources and, if it’s not your “principal residence”, selling it would incur capital gains taxes. Transferring ownership to your children allows all future gains to be taxed in their hands and means there will be no probate fees after your death.

Preparing the children

This is arguably more important than a financial plan – what good are carefully thought-out finances if the cash is frittered away or bitterly contested. A successful wealth transition understands the culture of the family, including where the wealth came from, family history, values, and vision for the future. The most obvious element is philanthropy. Your family may have certain causes or charities they’re closely associated with. For example, it’s highly likely that Bill Gates is immersing his children in the Gates Foundation, so its work continues after he’s gone.

Goal setting is also vital but rather than obsessing over returns, this should be more about fulfilling ambitions, dreams, and legacies. The key is to do this with the least amount of risk, which is where your independent advisor can help structure your investments.

Tom McCullough, chairman and CEO of Northwood Family Office, highlighted the lifetime and legacy approach, which categorizes a family’s objectives, and the assets required to achieve them, into two camps. The lifetime section focuses on things like maintaining current lifestyle, keeping an emergency reserve, or funding children's activities, while the legacy piece involves planning for the important destinations of the wealth transfer, like kids or charities.

Coming into a large amount of money sounds amazing (and it is) but the responsibility can be enormous and the pressure to continue the family tradition and success suffocating. Did you see Kendal Roy’s descent into madness when he tried to take over his dad’s empire?

It’s important, therefore, that the next generation is exposed to education, engagement, and experience. Bring the children to investment meetings with your advisor, let them learn about the structure of the finances, and even give them responsibility for a small piece of it so they can gain real-life experience. It’s important that they know what it feels like to make these decisions and even go through failure.

The psychological aspect facing the newest stewards of family wealth can easily be overlooked. While a chunky inheritance can mean an abundance of opportunities, a nice life, and the chance to help people, it can also take away people’s self-esteem because they know they didn’t accomplish it themselves. As McCullough neatly puts it1, it’s not just about families preparing the money for the heirs but about preparing their heirs for the money.

Perhaps the final word should go to Connor Roy, the oldest and most insipid of the siblings, who genuinely believed he could run for the President of the United States, despite not even being a major player in his own family. “I’m not saying I’d make a better CEO [than dad]. That’s unsaid,” he uttered in a moment of peak delusion.

A lack of real-life experience and engagement in the family business means he is spectacularly ill-equipped to take on the responsibility of managing large amounts of assets. Not only would he fail to understand the importance and structure of a financial plan, but he lacks all the qualities required to be a good steward of wealth.

Your independent advisor can assist your family, including the next generation, in planning for, and understanding, the lifetime and legacy elements of your wealth transfer. By putting in place a tax-efficient investment plan that protects your assets and helps prepare the children, you can feel more confident about what you leave behind.

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