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Australians unprepared for $3.5 trillion wealth transfer

A new report suggests that Australians, both young and old, are ill prepared for the largest wealth transfer in history.

It’s expected that about $100 trillion in assets world-wide will be transferred from Baby Boomers to their children over the next two decades. A 2021 Productivity Commission report estimated that around $3.5 trillion in assets will be transferred in Australia alone by 2050.

The inherited assets will mostly come in the form of superannuation and residential property. Inherited assets are predicted to rise from the current $120 billion per annum to $500 billion per annum over the next 25 years.

A recent report from stock trading firm, AUSIEX, found that the wealth transfer is likely to happen sooner than expected. It suggests Baby Boomers are leaving the workforce at an accelerated pace and they’ll be all but gone from workplaces by 2028:

“It doesn’t stop there. In 2027, the first of the baby boomers will reach their statistical age of death (81 years for men and 85 years for women).

Baby boomer superannuation balances will start to deflate out of the system through retirement consumption and then through disbursement via the inheritance process.”

Nest egg mentality

A new report from Fidelity International called Rainbow’s End suggests most Australians want to share their wealth with the next generation but are unsure how to transfer that wealth. Fidelity surveyed 1,500 people over the age of 26, spanning Gen Y, Gen X, Baby Boomers, and the Silent Generation.

The report found about 50% of people are only somewhat confident or not confident at all in knowing how their wealth transfer goals will be met. Part of the issue is that most of those surveyed aren’t confident that their retirement savings will be enough to support their desired lifestyle. And most also admit they have a so-called nest egg mentality – that is, they want to avoid spending money, so they won’t run out of savings or not have enough to pass on to their family.

Passing on assets now or later?

However, around two in five people prefer that their wealth be shared while they’re alive. That’s almost double the number who’d like to leave their wealth as a bequest.

Interestingly, though, while most of the survey respondents want to transfer assets while they’re alive, they want to leave the majority of transferred assets for when they pass away. The report found that two in three people are likely to transfer 60% or more of their assets after they die.

As one survey respondent, a male baby boomer, remarked:

“I think not giving away too much, too soon. And also trying to keep my children motivated towards their own self-achievement goals and not falling into the thinking of they can always rely on me.”

As for what people want to achieve when transferring assets, the top two goals of those surveyed are to help their children with financial security and express their gratitude and love for them.


Source: Fidelity International

The challenges with transferring wealth

Those surveyed in the report highlighted several key challenges in leaving a bequest or transferring assets while they’re alive:

  • Financial worries: having enough money to leave due to worries about the rising cost of living, insufficient savings, and the impact of taxes and fees.
  • Managing family issues: potential conflicts over the inheritance, disagreements over the distribution of the assets, differing expectations and interpretations of a will, and the possibility of rifts developing in the family.
  • Legal and administrative issues: ensuring the validity of the will, finding a trustworthy executor or trustee, and understanding tax implications.
  • Ensuring wishes are upheld: choosing the right person to receive the bequest, ensuring responsible use of the assets, and avoiding misuse or wastefulness.
  • Uncertainty and lack of knowledge: uncertainty about how to proceed, unfamiliarity with legal requirements, and a lack of information or guidance.



Source: Fidelity International

One of the more fascinating aspects of the survey is what children are expected to do with the money from their parents. One in three think it will used to pay down existing debts. One in four believe it will be spent to maintain the children’s desired lifestyle, while 16% expect it to go towards education.

Financial and estate planning advice

The upcoming wealth transfer has financial advisors licking their lips, and this report will leave them even more optimistic.

The report found that while most people aspire to transfer their wealth, far fewer have made concrete plans to do it. Nearly two in three intending to leave a bequest have a will, yet less than 10% have a comprehensive estate plan.

As for the popular source of advice for those receiving assets or an inheritance, a professional financial adviser tops the list, followed by self-reliance, and family.


Source: Fidelity International

The problem is that there may not be enough financial advisers to handle the increased demand for their services. There are now less than 16,000 advisers, down from almost 28,000 in 2018, before the Hayne Royal Commission.

Given the stringent education requirements to become an adviser, increasing those numbers won’t happen quickly. And superannuation funds being able to provide advice is unlikely to help much given most people require customised guidance for their personal circumstances.

A limited supply of advisers and growing demand can only mean one thing: prices will have to rise from current levels. With ongoing financial advice fees averaging close to $5,000 and out of reach for most people, it’s clear that industry change is needed. And fast.

 

James Gruber is an assistant editor at Firstlinks and Morningstar.com.au

 

16 Comments
Ando
November 06, 2023

Excluding the wealthiest families , any inheritance is going to be straight off the mortgage then down to the car dealership if it allows.
Planners won’t retain much Funds under management after what we have got ourselves into with mortgage rates, school fees, property prices and cost of living.

Aaron Kaufman
October 30, 2023

I think an inheritance has become an expectation in many sectors of society rather than the unexpected windfall it probably should be.
That said, I'm inclined to agree that by the time the majority of Boomer's pass, most of their wealth will have been consumed by their own care, accommodation, funding their lifestyles and so on, especially once inflation, taxes and so on take their bite. After all the whole point of superannuation is to fund ones retirement, not leave the kids a nest egg.
I don't think this transfer of wealth will prove to be any greater than any other intergenerational wealth transfer throughout the ages. Boomer's wealth is perceived not actual and as time goes on and the rules change, that wealth will erode, just the same as cash sitting in a bank account loses its value.

John
October 29, 2023

Rob comment (Oct 26th) assumes I am against people funding more of their aged care -- I am not. I sent my comment to this thread to point out that the intergenerational wealth is not going to be as big as people think. The other thing that Rob is not aware of is that very wealthy people go to nursing homes in this state (WA) that have RAD's over $700,000 and do not depend on the taxpayer i.e., they have no pension, and they have also means test associated payment daily living costs. The poor have nothing to pay. So, it is the middle classes that pick up the burden ie big RAD and other costs relative to their assets. Meanwhile they during their working life do the heavy lifting with personal tax. They will require bigger nest egg super to fund their aged care but now if this is greater than 3 million they get taxed the same way as someone with a 100 million super!

Roewen Wishart
November 09, 2023

I don't doubt John's calculations, but importantly in most cases, the very large majority of the Refundable Accomodation Deposit is....refunded (to the deceased person's estate, or to the person if they leave to live elsewhere). Of course, there's the opportunity cost incurred by earning no return on the RAD amount while it's held by the aged care provider. And John's point about daily contributions is separate (they are not refundable).

shooter
October 29, 2023

My biggest worry is our hard earned and accumulated assets be subject to family law split when passing on to our kids.

Don
October 29, 2023

We have decided to top up our children's ( in their mid 30s) and their spouses' superannuation each year to the max deductible. This at least transfers funds into long term tax effective holdings that can't be spent now.
Combined with legal loan documentation around any internal home loan assistance and Testimentary Trust based wills, we feel comfortable the balance of help V spoiling is as good as we can make it.
Clear communication and open exchange is our basis. All our kids see all our finances each year.

john
October 29, 2023

That is a good idea re holdings that can't be spent now because I have seen children waste it on junk, like from china etc.
However what about spousal split ?
What about those contributions preventing access to an eventual govt pension (but you may be rich enough not to have that as an issue).

shooter
October 30, 2023

I have the same question as John's. What have you done to protect the assets from spousal split, or you don't mind?

john
November 04, 2023

No answers to our questions as yet ??
Oh well I suppose even if one does leave holdings that cannot be spent now, the children will just buy that junk from China eventually later. Just delayed, so - no win, no win !!

Ricky C
October 27, 2023

After struggling with potential social and family complexities of life my family - mum, dad and ypung adult kids (beneficiaries) collectively agreed a Will bound up in a Discretionary Trust sufficient comfort to acheive our legacy goals.
Involving the next generation, agreeing on the the structure of passing any wealth on and them knowing they had access to the tools when their turn arrives have us all some kind of certainty. How more than What is passed-on has worked for us.

Jovan
October 27, 2023

Everyone is after everyone else's inheritance the biggest grabbers are the governments with their proposed "death tax". They tax us while we are alive and to satisfy their insatiable desire they have to drive the last nail into our cofins with tax. I personally think all politicians should be multiplied by zero.

Eva briggs
October 28, 2023

I tottally agree? everthing is costing us living expenses land rates etc making life very hard rich getting richer and the middle class struggling to make a living 

John
October 26, 2023

This wealth transfer is not going to be as big as everyone thinks. The cost of elderly care at home and nursing homes is massive and will make a big dent in estates. Having placed my mum in a nursing home after looking after her at home for a long time, this has been clear to me for some time. Most of mum's cash etc as gone in home care. Then the RAD took the full value of her home. The government is not able to or willing to fund aged care to the level it should. This responsibility will increasing be passed on to the estate/family. In the future the RAD will not be fully refundable as it is now. Currently the nursing homes are charging interest on the RAD of 8.1% if people do not have the funds to pay the RAD up front. RAD free nursing homes beds are becoming rare, with long waiting lists.

Mike
October 29, 2023

Sounds reasonably fair. The taxpayer pays almost all (96%) of the direct care (nursing and personal care) of older people who reside in an aged care home. The resident uses their own income and assets to pay for most of their everyday living costs (food, laundry, cleaning, power etc.) and their housing. The taxpayer pays a strong safety net for those without much in the way of income and assets. But the majority of aged care homes are running at a loss, so people with higher wealth should be paying more for their every living and accommodation to start offsetting these losses.

Rob
October 26, 2023

The "expectation" of an inheritance has a nasty habit of killing incentive. An "early" inheritance has a nasty habit of being long forgotten!

There is clearly a time but it is a balance - you do not want to run out of money, you do not want to pay Chalmers Death Tax and you do not want to receive postcards from your kids in Hawaii while you shuffle off to Aged Care!

Critically the older generation needs to talk about what is inevitable ie death, to the next generation and you have half a chance to collectively make sensible and productive decisions. For most people, that is way too confronting, much better to have an intra family brawl after you die where the accountants and lawyers win!!

Steve
October 27, 2023

Love it - well don’t Rob

 

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