The transfer of wealth between generations is important for many Australians, not just those with a family business or substantial wealth. Just as a company needs corporate governance, families too need governance regarding how their family assets are managed and divided.
Any family with a reasonable level of investable assets will benefit from some sort of governance structure to manage the transfer of wealth between generations and its preservation. Governance mechanisms can be either informal or formal, complex or simple, but it is important that something exists which lays down guidelines and rules for wealth transfer and its management.
Having worked with high net worth families (HNW) it’s clear that even an informal structure or approach is better than having nothing at all. A framework can cover several factors, including identifying which assets need to be managed, how those assets will be preserved or divided, who will be involved in making those decisions and how to manage risks.
There are several factors which might pose a risk to the value of a family's assets, including the dynamics of a family’s evolution, changing values through generations and dispute resolution mechanisms when conflicts arise between family members. All of these factors can be managed by establishing principles and a governance structure to ensure a smooth transfer of wealth between generations. Where there is no governance structure in place, disagreements on the division of wealth can erode a family’s assets and even lead to irreconcilable differences within a once close family. A clear framework can help to support harmonious relations within families so they can overcome challenges to both the family and its assets.
Demographic factors too are supporting the need for intergenerational wealth management. The last of the baby boomers are entering retirement and making decisions about how to use their assets in retirement and transfer wealth to subsequent generations. Decisions on that transfer may involve a family business, which can make matters more complex and raise concerns about possible mismanagement of the business.
Research by LGT Crestone has found that the more money there is to transfer, the greater HNW individuals worry that it might be poorly managed or may not be distributed according to their intentions. Almost a quarter (23 per cent) of HNW individuals with net investable assets between $5 million and $10 million are very worried about wealth transfer, according to a report released by – LGT Crestone in 2021, Insights Paper, Intergenerational Wealth Transfer. One-third (34 per cent) of HNW individuals with net investable assets more than $10 million are very worried about wealth transfer.
Apart from the ageing of the population, the COVID-19 pandemic has been a wake-up call that forced some HNW individuals to initiate, or review their, wealth transfer plans. The LGT Crestone Insights Paper reveals that more 55.5 per cent of HNW individuals had a clear plan for their wealth transfer process in 2021, up from 43.2 per cent in 2020 and 36.6 per cent in 2019.
The LGT Crestone paper found that the most concerning wealth-transfer issues include potential mismanagement of wealth (46 per cent), adverse tax implications (40 per cent) and unintended wealth distribution (39 per cent). So, there is clearly a need for advice on overcoming this potential for worry, mismanagement and disagreements on how wealth should be divided.
A framework governing intergenerational wealth transfer should help families better manage assets with an investment policy in place to generate assessed income needs, preserve assets and maintain control within the family. Other important factors that can be incorporated into a framework include a family’s values and its goals, including financial or philanthropic goals and the most appropriate investment vehicle to hold assets. Establishing goals for family wealth transfer requires thoughtful consideration and competent advice. Having a family business may add to the complexity of the various options available to manage and maximise business potential.
But action is important. Generally speaking, where family wealth does survive over several generations, the success in maintaining that wealth has been underpinned by developed principles, guidelines and governance for the family’s business and wealth. Many HNW families use the services of specialised trusted financial advisers to manage their assets. The responsibilities of such an adviser can be tailored to meet the needs of individual families and can include selecting the best investment specialists for individual asset classes, consolidating assets, introducing a specialist where required to advise on such aspects as buying and managing property, coordinating investment vehicles such as trust funds and foundations, as well as handling legal and taxation matters. LGT Crestone advisory services combine the expertise of a wide range of internal and external specialists.
