Inter-generational Wealth Transfer

According to the veteran City financier, Ken Costa, over the next 25 years, the world is set to become an ‘inheritocracy’ as older generations start to transfer their wealth to younger generations.

In the UK, the Kings Court Trust has estimated that around £5.5 trillion will pass between the generations within the next 30 years. In the US, an estimated $70 trillion is expected to shift from older to younger generations according to Cerulli Associates.

Lack of Planning

Despite the huge sums involved, research from the Royal Bank of Canada suggests that, in the UK, only 26% of people have a full strategy in place to transfer their wealth to the next generation whereas one in three people have done nothing to prepare for passing wealth to the next generation.

In my own experience working with wealthy families, there is a reluctance to discuss estate planning which can cause a number of issues:

The beneficiaries of significant wealth can feel under-prepared to accept and manage the inheritance.
A lack of planning means that beneficiaries may have a large Inheritance Tax (IHT) liability or they have inherited relatively illiquid assets that they now need to sell.
The beneficiaries don’t feel that they are the stewards of family wealth which means that wealth is often diluted for subsequent generations.

Starting The Conversation

It is important that wealthy families start engaging with the next generation as early as possible so that they can both share their views with regard to the family’s wealth.

One of the best ways to begin the conversation is for the current generation to tell the story as to how they accumulated the wealth in the first place and the problems they faced.

For example, perhaps they are the first generation to be wealthy and their wealth came from starting a business. The current generation can explain how the business came to be successful and the trials and tribulations that were overcome along the way.

If the wealth was itself inherited, the current generation can share their experiences with the younger generation of how they dealt with the inheritance and the advice, or lack thereof, they were provided at the time and the successes and mistakes they made in managing that wealth.

Legacy

By starting the conversation early on, it can set both generations’ expectations and prevent any surprises. For example:

The current generation may not want to give all their money to their children. Instead, they may be considering giving a reasonable amount to future generations and the rest to charity during their lifetime. Warren Buffett told Fortune Magazine in 1986 that he would give his children, “enough money so that they would feel they could do anything, but not so much that they could do nothing.”
The current generation may feel that the best legacy they can provide future generations with is a great education along with some capital to get them started.
By communicating their views around the legacy they wish to leave, the current generation can better prepare future generations as to how the wealth should be managed. This can lead to future generations accepting the role of steward or custodian of family wealth.

Involving Future Generations

Where there is considerable wealth, it makes sense to involve future generations as early as possible so that they can be better prepared. There can be a number of ways to do this:

Start the education process early. For example, this may involve working with a wealth manager to explain concepts around how different asset classes behave.
Allow the next generation to get involved in making investment decisions. This can then provide some practical experience around how investment decisions are made and how they subsequently perform.
Engage future generations in any philanthropy activities so that they can experience the positive impact giving money away can have.

Purpose and Values

By starting the discussion around wealth and inheritance early, it makes it possible to identify and work towards shared values. Future generations will be in a better position to manage inherited wealth if they know the purpose and values associated with that wealth. This will enable them to make better investment decisions as there is a clear objective for the wealth.

Climate Change and Social Inequality

Increasingly, wealthy families are considering the impact their wealth is having in respect of climate change and social inequality. Both current and future generations are recognising that their wealth can have a positive impact on the world whilst also appreciating the risks that climate change and social inequality can bring.

For some wealthy families, impact investments can play a significant role in how their money is invested providing them with a degree of control and this can be either as an alternative to or in addition to philanthropy.

Trusted Advisers

It is important that wealthy families have a team of trusted advisers around them which can include wealth managers, lawyers, tax advisers as well as other professionals.

A trusted adviser can also act as an independent sounding board and facilitate the discussions between the different generations as well as the different advisers.

How Can We Help

For a confidential discussion around how we can help you with your estate planning requirements, please do contact us using the button below.