20 December 2022

According to our research on how Australians are managing their wealth, 35% of Millennials and 43% of Gen Z are expecting to receive an inheritance from the bank of mum and dad or nan and grandad. Intergenerational wealth transferred from Baby Boomers, who made their money through a boom in property prices and superannuation, raises concerns about how this wealth will be managed when it changes hands to the next generation.

As much as parents may hope their children will take and improve upon what they have built; they should also consider that the younger generation are likely to have a different perspective on wealth and the future. This may be attributed to them being more resolute and less conservative when it comes to life choices, including how and where they spend their money, unlike when their parents were the same age.

This difference in attitude poses a huge worry for older generations, who don't want their years of sacrifice and hard work being lost. Ultimately, action taken by parents or guardians now to instil financial literacy in the next generation will help them develop the right skills to be able to make measured decisions when the time comes to inherit their parent’s wealth.

Understanding intergenerational wealth

Intergenerational wealth is wealth that is passed down from one generation to the next, usually from parents to their children. It can include, but is not limited to, assets such as land, real estate, shares, bonds, cash, and family businesses.

To assist with the management and distribution of assets, families may choose to draft a family constitution or charter, or they may opt to deal with the transfer of assets via a Will. Whatever the method of governance employed, it is important to seek out the services of a professional with experience in this area.

The importance of intergenerational wealth for the next generation

Australia is one of the countries that will partake in the great intergenerational wealth transfer. According to the Grattan Institute, the Baby Boomer generation tripled its wealth over 30 years from $2.8 trillion in 1990 to $10.3 trillion in 2018. Coupled with increased life expectancy, the older generation can expect to enjoy the proceeds of their wealth for longer. This, in turn, sets the precedent for the younger generation to inherit substantial amounts of wealth that they may or may not be prepared to receive.

Factors such as appreciation of home values, tax benefits, and superannuation can be largely attributed to the success story of Baby Boomers. On the other hand, Millennials and Gen Z are unlikely to experience the same, given that Millennials between ages 25 - 34 are less likely to own a home than Baby Boomers when they were at the same age. Even so, inherited wealth offers them a chance to build themselves up and even pass along wealth to their own children and grandchildren.

Currently, many Australians are facing a sharp rise in the cost of living which may erode the value of inherited assets and the income streams that come from them. High-interest rates make it expensive to borrow and can negatively impact the value of investments. These conditions can make it difficult for the next generation to further grow the wealth that has been left to them.

Four ways to help the next generation prepare

By 2050, around $224 billion will pass hands every year to Millennials and Gen Z. This raises questions about the effort they intend to put into the creation of their own wealth and calls for parents to educate their children on the intricacies of wealth management or, at the very least, point them in the direction of expert help.

Preparing your loved ones to effectively handle intergenerational wealth, will not only benefit their financial security, but it will also give you peace of mind that your legacy is in safe hands. Here are some tips on how to get started.

1. Start the conversation

As uncomfortable as it may seem, having an open and honest conversation around the transfer of wealth with your beneficiaries can help to avoid ambiguity down the track.

Start by sharing your hopes for the future and keep the conversation as two-sided as possible – you don’t want to come across like you’re laying down the law. Instead, explain how hard it has been to build up a nest egg and ask them questions about what their desires and values are, to help include them in the conversation.

2. Cover money basics

Financial concepts can sometimes seem more complicated than they really are so don’t be afraid to begin teaching your kids the basics from an early age. From saving and debt management to compound interest and investing in the share market, the more conversations you have around these matters, the more familiar your children will become and the less overwhelmed they will be when they receive their inheritance.

3. Set expectations

Not all inheritances are equal, and this is especially true if you have multiple beneficiaries. If you worry your beneficiaries may feel aggrieved by the provisions you have made for them in your Will, engaging them now could help you deal with reservations before it’s too late.

Whether it’s discussions around property ownership or who is taking over the family business, don’t forget to ask them how they feel and explain the reasons behind certain decisions to reduce the prospect of disappointment or ill-feeling down the track.

4. Show them where to find help

When it comes to protecting your family’s wealth, connecting your beneficiaries with a financial adviser early on means they can establish a relationship of trust and openness that will not only serve them well upon the receipt of an inheritance, but also with the accumulation of their own wealth.

A financial adviser that has worked with the family will have an intimate understanding of your wishes and objectives and will help to remove emotion when decisions need to be made. A family accountant can offer expertise in tax-related matters and help your beneficiaries minimise any unforeseen tax consequences while they come to terms with your absence.

Key takeaway

An increase in individual wealth among older Australians promises a boon for the younger generation. However, without careful planning and financial prudence, your accumulated wealth might not last the next generation. Therefore, it is important to have the big talk with your family for their benefit. Through these conversations, you can impart any pertinent skills, knowledge, and values that will last their lifetime. Also, don't overlook the assistance of finance or tax professionals when planning for the transfer of your wealth.

At Findex, we want to help you get it right with your family when it comes to intergenerational wealth. We offer wealth management services for the whole family, where we consider your goals, objectives, and needs to come up with a tailored financial plan to help benefit multiple generations. Please contact us today.

Sources:

1. Findex, Managing Wealth Report, 2022

2. The Sydney Morning Herald, Baby boomers win 'the demographic lottery' as wealth inequality grows, 2019

3. The Conversation, How well off you are depends on who you are. Comparing the lives of Australia’s Millennials, Gen-Xers and Baby Boomers, 2022

4. ABC, The biggest cost of living increase this year — rising interest rates — climbs again, 2022