The Looming Problem with Family Wealth Transfer

The Looming Problem with Family Wealth Transfer

Dave Rae

Dave Rae CFP®, owner and director, DPR Wealth

Think that an inheritance will solve all your financial worries? Don’t assume it, and make sure it’s structured correctly, writes Dave Rae, financial planner.

The transfer of wealth in Australia looms as a significant opportunity with around

$3.5 trillion expected to be passed down over the next 20 years1. While this equates to an average inheritance of about $320,000, around 25 per cent of inheriting Aussies will receive more than $600,000 each2.

Receiving a sudden large sum of money, whether an inheritance, a lottery win, or an insurance pay-out, can cause a range of emotions and reactions. When a family member passes away, you are dealing with grief but add in estate issues and it can lead to anxiety, resentment, or a fear of losing money.

A study in the US by The Williams Group3 revealed that 70 per cent of wealthy families will lose their money by the second generation. If that’s not alarming enough, 90 per cent will be lost by the third generation. Coincidentally, studies also show that if you win the lottery, there is a 70 per cent chance that you will blow it all within five years4.

Hard to imagine, isn’t it? But a sudden windfall can lead to feeling like you never need to worry about money again. Ironically, it’s this lack of worry that can lead to splurging on cars, holidays and gifts before thinking about the future. Evidently, the majority of people are not equipped to deal with this situation.

Most of us cannot imagine our families could be ripped apart by money. But money can do strange things to people. We’ve read about high profile families who have sued each other or no longer talk due to money issues. You don’t think it can happen to you? The number of estates that end up in court is on the rise. And what of the young lives ruined by too much money too soon? No value or appreciation for hard work and making your own way.

How do we ensure we make the most of this once-in-a-lifetime opportunity for the next generation? Not just to protect your wealth, but to protect your children from being ruined by it?

I believe the most important aspect of intergenerational wealth planning is understanding the wealth behaviours of beneficiaries. Sarah Fallow of Data Points5 has identified a series of distinct and consistent factors that predict the likelihood that an individual will build and maintain wealth. Her research is based on 40 years of behavioural study. It also incorporates the work of her father Thomas Stanley and his ground-breaking book The Millionaire Next Door.

The behavioural factors that have been identified as leading to wealth building are:

  • Frugality – willingness and ability to spend below your means
  • Responsibility – extent to which you take control of your finances
  • Confidence – belief that you can improve your situation
  • Planning and monitoring – setting goals and monitoring your progress to achieve them
  • Focus – discipline to avoid distractions and stay on track to reach your goals
  • Social indifference – spending to display social status versus social indifference to the spending of others

Together these factors can be assessed to reveal who is more (and less) likely to build and maintain wealth. Understanding the wealth building potential of each beneficiary could be key to understanding who is likely to spend or save their inheritance. This could be the difference between Generation X setting themselves up for the future, or spending and eroding it in just two years6.

What are the actions a family can take to improve the outcome from both a financial and personal point of view? The following should be considered:

Estate planning – the simple option for a Will is that assets are evenly split between your beneficiaries. However, this won’t help if behavioural issues have been identified. Should you consider a testamentary trust (a trust created via a Will)? This is useful from a tax point of view, but also has the ability to provide asset protection which can be advantageous if a beneficiary goes through a relationship breakdown, has a disability, owns a business or has drug issues. Consideration of whether a beneficiary receiving their capital immediately should extend to whether they are financially responsible enough to handle it.

An extension of the estate planning process should also consider:

Money behaviour assessment – for each beneficiary as outlined above to understand their wealth potential. If a beneficiary has a low wealth potential then steps can be taken to protect the estate and the damaging effects a windfall could have on the beneficiary.

Financial education – at the estate level in order to gain an understanding of the issues. At the beneficiary level education can be tailored depending on individual wealth building potential of each family member.

Communication – hold a family meeting to discuss the relevant issues, explain the estate plan and agree on an education plan. Consider advice arrangements to be put in place at the time of wealth transfer and post transfer to ensure it endures.

Early inheritance – increasingly older Australians are gifting a portion of their estate sometime before their death. Whether it is to assist their children into the property market or pay for their grandchildren’s private school education. Again, it’s important to consider the financial responsibility.

Family charitable trust/foundation – no longer the sole domain of high net worth families. A charitable trust can bring together family members for the common purpose of giving back.

To view more from Dave Rae click here.

1 Wealth Transfer Report Aug 2017 – No More Practice Education & McCrindle

2 Intergenerational Wealth Transfer: The Opportunity of Gen X & Y in Australia – Griffith University & No More Practice Education


4 Financial Psychology and Life Changing Events – Financial Windfall – National Endowment for Financial Education


6 Wealth Transfer Report Aug 2017 – No More Practice Education & McCrindle

The opinions expressed in this content are those of the author shown, and do not necessarily represent those of No More Practice or its related entities. This information is general in nature and does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. To view our full terms and conditions, click here.

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