Preparing for the Biggest Wealth Transfer in History

The next 20 to 30 years will see the biggest intergenerational wealth handover in history, predominantly between ‘baby boomers’ and their heirs. So why is it important to discuss inheritance planning with your family if you fall into this group?

Transfers of accumulated wealth from one generation to the next are part and parcel of everyday life.

But the next 20 to 30 years will see the biggest intergenerational wealth handover in history.

The largest part of this great wealth transfer will be between members of the “Baby Boomer” generation (people born just after the end of World War II through to 1964) and their children and other heirs.

According to some estimates, over the coming decades at least $3.5 trillion of assets will be inherited in Australia alone.

This will include family homes, investment properties, superannuation money, direct shares, and a wide range of other financial and non-financial assets.

Research just released by the UK-based Institute of Fiscal Studies (IFS) notes that the value of inheritances will not only grow dramatically but will be an increasingly important source of income and wealth for younger generations.

In fact, IFS found that 72 per cent of people born in the 1960s are expecting to receive an inheritance from their parents, rising to 81 per cent for those born in the 1980s.

The growing inheritance divide

The IFS research is interesting in that it projects the inheritances to be received by the 1960s, 1970s and 1980s-born generations in the UK.

It found that average inheritances compared to lifetime income are likely to be almost twice as large for people born in the 1980s compared to those born in the 1960s.

Another key conclusion in the IFS research is that inheritances will increase inequalities between people with richer or poorer parents.

The effect of inheritances on inequalities by parental background is expected to be larger for younger generations.

For those born in the 1980s, inheritances are projected to increase lifetime incomes by 5 per cent, on average, for those with parents in the bottom fifth of wealth distribution.

That compares with an expected 29 per cent increase in lifetime incomes for people with parents who are in the top fifth of wealth distribution.

The IFS research on this accords with some of the key findings in the final Retirement Income Review released by Australia’s Department of the Treasury in July last year.

Treasury concluded that inheritances could help rebalance intergenerational differences in opportunities to save for, and outcomes in, retirement.

However, it also found that inheritances can be ineffective at equalising opportunities and outcomes between generations, as their size and timing are not guaranteed.

Planning for inheritances

Inheritance planning, unlike succession planning within a business, is an area that’s rarely discussed at the family level.

Most families regard subjects such as death and the future division of wealth as unpleasant, and potentially sensitive when multiple heirs are involved.

But there’s a lot to be said for having open discussions within your family about the intended treatment of assets and future inheritances.

Creating a valid will, and specifically documenting how you want your assets to be managed and divided after your death, should be a key step in the inheritance planning process.

Residential real estate and superannuation, which combined make up more than three quarters of total household assets, are the largest components of most inheritances.

Treasury estimates that assuming there’s no change in how most retirees draw down their superannuation balances, superannuation death benefits will increase from around $17 billion to just under $130 billion by 2059.

Ensuring that any superannuation you have left over at the time of your death is distributed according to your wishes requires you to complete a binding death benefit nomination provided by your super fund.

It’s important to be aware of any potential tax implications. For example, while superannuation distributed to a surviving spouse or dependent children is generally tax free, non-dependents (including adult children) may be required to pay tax on amounts they receive.

That comes down to how much of your super is made up from pre-tax and after-tax contributions.

Capital gains tax does not apply if someone inherits direct shares or other financial securities, but tax may apply if they later dispose of them.

Any unapplied capital losses that could be used to offset capital gains tax cannot be transferred to beneficiaries.

Conclusion

Estate planning can be complex so professional advice may be a prudent step. Our experienced team at Calibre Private Wealth Advisers can help you and your intended beneficiaries map out an inheritance framework that also identifies issues such as potential tax liabilities.

Next steps

To find out more about how any of these measures may be of assistance in your individual circumstances, please contact Gordon Thoms or David Conte at Calibre Private Wealth Advisers on ph. (03) 9824 2777 or email us here.