Why 70% of Inherited Wealth Vanishes by the Second Generation

Creating generational wealth is new skill set for many of us.  As our society becomes wealthier new complexities arise in managing and transferring wealth. Many people do not consider themselves wealthy yet own millions of dollars worth of property.

With $5.4 trillion set to pass from Baby Boomers to younger generations over the next 20 years, the role your financial adviser plays is paramount in ensuring that wealth is transferred effectively and with certainty.

Understanding the Challenges of Inherited Wealth

Estate planning can be complex, especially with the evolving dynamics of modern families. Divorce, blended families, and disputes over inheritance complicate wealth distribution. Research indicates that 70% of families lose inherited wealth by the second generation, and 90% by the third. Additionally, financial literacy gaps among younger generations exacerbate the risk of this wealth erosion.

Trends in Estate Planning

Property remains a cornerstone of Australian wealth, but skyrocketing prices have made homeownership unattainable for many younger Australians. As a result, we see a growing trend in early or living inheritances, where parents are shifting their priorities to support their adult children financially, particularly with purchasing their first home.

The Role of Investment Bonds

Investment bonds are gaining traction as an effective tool for estate planning. Governed by the Life Act and considered a non-estate asset, they offer flexible, controlled, and tax-effective wealth transfers. Investment bonds provide greater control by allowing individuals to decide how and when their wealth is distributed without the complexity of a trust. They can help clients achieve their generational wealth goals by:

• Sitting outside of the will and therefore less likely to be challenged.

• Providing the ability to transfer ownership tax-free, offering flexibility in how beneficiaries can access funds.

• Adding a layer of protection in the event of bankruptcy.

  
  

Comparing Structures

While many Australians have large superannuation balances and assume this is the best way to pass on wealth, super was not intended to be used as a wealth transfer tool. Legislative risk and proposed changes to super, are causing concern. Superannuation death tax can be an unexpected financial burden, and trustee discretion can lead to disputes. Family trusts, while providing control over wealth distribution, require ongoing management and tax reporting, making them complex and not always suitable to family members.

The Importance of Getting Advice

Without careful estate planning, inherited wealth can be significantly eroded by taxes, legal disputes, and poor financial management. A well-structured plan that involves your financial adviser, tax specialist and estate planning professional working together ensures that beneficiaries receive their inheritance tax-effectively, preserving wealth for future generations.

General Advice Warning - This communication has been prepared on a general advice basis only. The information has not been prepared to take into account your specific objectives, needs and financial situation. The information may not be appropriate to your individual needs and you should seek advice from your financial or tax adviser before making any investment decisions.