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Audrey* enjoyed a rewarding life. Her devoted husband, Frank, passed a few years ago – they had built their wealth over a lifetime together and ensured Audrey was financially secure. She has two successful sons and five grandchildren. In her late 80s and in failing health, she could take comfort from the fact her financial affairs had been structured to maximise the benefits for her family for generations to come.

Following Frank’s passing, Audrey’s assets were held across both their longstanding SMSF, and a substantial portfolio held in her name. Audrey understood the importance of having conversations with their sons about her wishes and having them involved in the structuring of her estate in preparation for the transfer of wealth.

While this task was made easier from being a close family unit, it still required lengthy discussions to ensure the best outcome—highlighting the value for all families with wealth to be inherited of having plans in place early to ensure assets pass prudently and equitably.

In dealing with people who have very real hopes and fears, intergenerational wealth transfer is not just about what makes sense through a dispassionate, mathematical lens – it must reflect the clients’ wishes and values around their family and legacy.

This type of forward-thinking planning is crucial, particularly as Australia is in the early throes of the intergenerational wealth transfer, that the Productivity Commission estimates will total about $3.5 trillion by 2050.

Family conversations are critical

Audrey had said that she and Frank, an accountant by profession, always encouraged money discussions with their boys from an early age. In many families, this topic can often be taboo.

But by having these conversations, parents can have greater comfort that their wishes will be respected (remember, wills can be successfully challenged in the court system), and the recipients better understand not only the financial fundamentals, but the gravity of inheriting significant wealth.

It’s critical that it does happen – for two key reasons. Firstly, with former generations, the quantum of wealth shifts wasn’t nearly as pronounced. The baby boomer generation (1946-64) is the first generation where wealth is far more widespread due to property prices and, to a lesser extent, compulsory superannuation. So, the need for these discussions is more important than ever.

Secondly, it’s a reality that basic financial education is sadly lacking in the school system. For those families with a financial adviser, there’s the opportunity include all family members in the discussion. But this is a minority, meaning the onus is on the family to impart this critical skill set on to their children.

Asset allocation needs to be considered

Investment considerations are also a key component. Audrey’s eldest son, John, has a more balanced investment approach, more aligned with his late father’s penchant for fully-franked Australian blue-chip shares, while his sibling Nicholas, five years his junior, has a greater interest in assets with a higher-risk, higher-return investment dynamic.

Although the brothers have differing ideas on investment, they appreciated and understood the foundations of investing courtesy of the many family discussions about financial matters. Part of the wealth transfer process was the appreciation that as assets were passed down, the underlying investments and asset allocation of the capital would inevitably change to reflect the goals and time horizons of the adult sons and their families.

What did this look like in our example? Audrey had a substantial amount in superannuation via her SMSF and a significant personal portfolio. Due to Frank’s conservative outlook, it was overweight large-cap Australian blue-chip shares and cash – given their stage of life, the fully franked dividends came with substantial tax benefits, and investors typically grow fond of holdings that have served them well through the years.

Remember also, markets are volatile. In the 21st century, we have had the Tech Wreck, the GFC, and COVID market meltdowns.

Regardless of life-stage, asset quality within portfolios is paramount in helping clients withstand market volatility and reducing the risk of impairment, as is the need to be diversified across both traditional and alternative asset classes in seeking to produce robust long-term outcomes and generate revenue through the economic cycle. In short, all the capital should not be exposed to all the same risks.

It’s not just about adapting the investment style to each estate recipients’ investment tolerances and prejudices; it is vital to utilise strategies to minimise the tax burden during the transfer.

What happened in Audrey's case

So, conscious her health was rapidly declining, an estate planning lawyer was brought into the fold with Audrey and her sons – seeking to ensure the optimal structure for the impending wealth transfer. What does that look like in practice? Her will was updated to establish a testamentary trust for each son upon her death. Audrey also withdrew her superannuation ahead of her passing to avoid any taxable component being taxed at 15% (plus Medicare levy).

When she passed, the assets were left to her sons in their testamentary trusts (a vehicle that the sons’ entire families could benefit from), and portfolios customised within each trust. Generally, a discretionary (family) trust can be an excellent vehicle for transferring wealth. In addition to the tax-effective flexibility to distribute income and capital gains between beneficiaries, as its ‘lifespan’ is 80 years in most states, by planning the seamless transfer of control (i.e. the pre-determined ownership change of the corporate trustee shares, for example) the portfolio within can endure in the same structure beyond the death of the matriarch or patriarch – in line with their wishes and without needing to sell assets and incur tax.

In Audrey’s case, by adopting this approach, they avoided the real risk that many families confront on the passing of a loved one – no planning, no strategy to minimise the tax drag on the estate, and even no will. Tragically, it often means a time for genuine grief gets consumed by family disagreement over the estate. So much better to plan, especially with $3.5 trillion at stake.

* Family names have been changed

Peter Nevill is an Adviser at Viola Private Wealth. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs.

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