As the cost of living including housing prices continues to rise, many parents are providing greater financial security for their children. This has led to more family discussions regarding the transfer of wealth. Transferring wealth between generations can be a challenge when there are many parties involved with different opinions and no clear plan in place. We have provided 4 talking points to help make this process easier and to avoid conflicts before the transfer of wealth occurs.
Super Tax Impact.
One of the most common methods of wealth transfer is, unsurprisingly, through superannuation. However, it is often the case that the children recipients are no longer tax dependants of the benefactor. What many don’t realise is the transfer of one’s superannuation benefit on their passing may trigger a 15% death benefits tax, plus Medicare levy which is applied to a considerable portion of their superannuation balance. The taxable portion of a superannuation balance is usually made up of the normal super guarantee payments made by employers over a member’s working life as well as any salary sacrifice contributions.
Super Tax however may be avoided if the benefactor plans ahead and withdraws their superannuation benefits prior to their death and are left to their children as part of the will. It is important to note that this strategy is only effective if a benefactor is comfortable withdrawing these benefits as they will be moved into a fully taxable environment. As such, any income earned on this money will be taxable. Before considering any estate planning strategies, you should consult a licensed financial adviser or legal professional to ensure that the benefactor is making an informed decision.
Plan Trusts Carefully.
Holdings assets in superannuation may be great for a number of reasons including taxation and asset protection. In this instance, some individuals may choose to establish a legal structure for the specific purpose of transferring wealth to future generations. Often this is in the form of a testamentary trust and is created within the benefactor’s will.
Typically, these trusts are structured as one central vehicle, however sub-trusts for each child or recipient are becoming more popular in order to help avoid family disputes and provide more control over assets. Separate trusts allow the recipients to invest their portion of the entitled benefit differently and in the longer term, run their finances independently of their siblings.
This is particularly valuable when leaving money to Millennials, many of whom have indicated a strong preference for investing in line with personal values and principles, such as environmental, social and governance issues. Around 63% of young investors see the value of working with a professional investment adviser but want the power to make final decisions themselves, partly because of this desire to invest in line with their values, Credit Suisse research shows.
Lay it on the table.
While the preparation of appropriate legal structures and the tax implications at the time of death are important, it is equally important to ensure wealth transfer is handled smoothly and in the best interest of all parties.
Having informal conversation between the generations of a family about money and what is coming or not coming and what the intentions are, is a great way to ensure the whole process is a lot smoother. This way, any underline concerns can be remedied before it is too late, and all parties involved can have a sense of security.
When there is no conversation around inheritance and money just appears for recipients or in some cases, does not, it may lead to family arguments and disputes and contested estates.
Get the kids up to speed.
Informal conversations and in-family education are important learning experiences when it comes to transferring wealth smoothly. One of the more practical things a parent or benefactor can do is raise their children with a level of financial literacy and appreciation of the fundamentals of wealth creation and preservation, so they are better equipped and prepared at the time of inheritance.
Bringing the youngest generations into these informal family discussions, even when they are children, can be crucial in laying the groundwork for a seamless transfer of wealth in later life.
This is also a great opportunity for the benefactors and beneficiaries s to explain what and how they plan on utilising the inheritance, for example to spend it on property or education, rather than holidays or more lifestyle-oriented consumption. While older generations may feel uncomfortable about these kinds of open money conversations, it could be the best way to help ensure they have a say in what their legacy provides.