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. 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 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.
Other tax-efficient methods of transferring wealth are to gift money earned on the sale of your home when downsizing, utilizing the tax-sheltered growth within a life insurance policy, having it protected from creditors and eventually pays out tax free to beneficiaries in a totally private way. 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 may be a significant asset. A cottage is often a place where family memories are created but the cost to maintain a cottage can be a drain on parents in retirement and possibly more expensive than the next generation can afford while raising a young family. In addition to the cost to purchase and maintain a cottage, upon the transfer of ownership to children, the gain in value of the property will be taxed as a capital gain. Though the property may not be sold, the family will need to have enough cash available to pay the capital gains tax. Family cottages are one of the most emotional components of a Wealth Transfer and planning is required to deal with the cottage and maintain family harmony.
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 considers the culture of the family, including where the wealth came from, family history, values, and vision for the future.
An often-overlooked aspect of preparing children to think about and manage money is philanthropy. Many families have certain causes or charities that they are involved in and/or want to support. Having children involved in picking the charities, participating in the management, and gifting of the funds can help them to understand and appreciate aspect of money. 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 and often has nothing to do with market returns. Goals should be more about fulfilling ambitions, dreams, and legacies.
Coming into a large amount of money sounds amazing (and it can be), 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?
The psychological aspect facing the newest stewards of family wealth can easily be overlooked. While a large 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.
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.
It is never too early to start thinking about a plan that 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 plan that protects your assets and helps prepare the children, you can feel more confident about what you leave behind.