Wealth transfer and the next generation

Much has been studied, anticipated and suggested about the next generation in relation to the significant wealth transfer on the horizon in Canada — their state of readiness; the different social, educational, workforce and economic trends they may face; and, how these factors and others may impact their financial decisions or approach to planning. Before looking directly at these aspects specifically as they pertain to the next generation, however, it is important to take a step back and view wealth transfer in its entirety as a multi-generational process. Beyond the basic process itself, that is, wealth being passed from givers to receivers and the decisions for how to accomplish that, individuals and families should be giving proper consideration to the entire scope of planning, including education, knowledge sharing, family dynamics, communication, preparation, and methods or approaches. Yet, while these components are central to the overall success of wealth transfer to the next generation, this “big picture” thinking and approach seems to be missing among a number of Canadian families. The reality is that overall, research indicates only approximately 30 percent of all wealth transfers are successful (with success being defined as the family retaining control of its assets and family harmony post-transfer to heirs). It was found in this study that 95 percent of the failures were attributable to the family itself — namely, a breakdown or lack of family communication, inadequately prepared heirs, and failure to establish a family mission.1 With those statistics in mind, unpacking the reasons behind the general lack of success is vital as a means to find the best strategies to meet individual and family circumstances and to help ensure the creation of a lasting legacy for generations to come. As part of successful wealth planning for Millennials, we offer four considerations to help guide the process.

1. Financial education – too little, too late?

Within the recent RBC Wealth Management (RBC WM) “2017 Wealth Transfer Report” it was found that the average age respondents began to receive structured financial education in Canada was 26. Strictly from a life stage standpoint, this means many individuals are already well out of their educational years and have transitioned into adulthood (taking on the financial responsibilities and independence that come with it) before they have developed a strong — or sometimes even foundational — knowledge of financial management. As such, many have likely made a number of financial decisions and there is a high likelihood that there may already have been missed opportunities in the areas of spending, saving and budgeting (basic financial principles), investing (investment principles), and wealth management (e.g. Wills, trusts, tax strategies, etc.).

This late age at which many individuals are being introduced to wealth and financial topics may have a number of implications when it comes to preparing to inherit or manage wealth. One of the main issues that may arise for some is the short time span between when they begin to learn and when they actually start to receive inheritances. Within the report, it was noted that, on average, inheritance begins at 29 from the grandparent generation. And while the average age for receiving inheritance from parents is 44 (meaning there is more time to build financial literacy), findings from the report indicate there is a relationship between age and confidence level when it comes to financial decision-making. Specifically, 66 percent of those who were under 18 when they received their financial education feel confident when it comes to financial and money topics; when the education takes place between the ages of 35 and 55, under half of respondents feel confident in their knowledge. With that in mind, helping the younger generation start earlier and engage in structured financial learning may be very beneficial to improve their financial management skills and confidence down the road.

2. Finding the right educational resources

Beyond education in general, it is also important to examine the types and formats through which this learning may take place, and consider which are most effective. Canadian trends reported in the “RBC WM 2017 Wealth Transfer Report” seem to lean towards more informal sources of knowledge and education, the main form being general conversations with family over the course of life. But while this may be the most common method, respondents actually noted that they deemed financial literacy education offered by their qualified professional advisors to be the most effective in enhancing knowledge of wealth. Other methods that ranked fairly high include training through involvement in a family business, financial advisor meetings and family meetings.

Given the range of methods and the differing levels of effectiveness, individuals and families may benefit from a more varied and comprehensive approach that combines informal and formal learning opportunities. Here, it is important to recognize that there is definite value in the family discussions and those do need to take place; at the same time, however, it may prove very beneficial in broadening education and imparting more knowledge by augmenting personal and family learning with more formal methods, such as through a qualified professional wealth advisor. A starting point to consider in this regard is arranging for your family members and heirs to have an introductory meeting with your qualified professional advisors as a means to establish a relationship among the next generation and to find out about potential financial literacy education opportunities or resources your advisors may be able to offer.

Financial literacy for youth

For more information on developing smart financial management skills among children, youth and young adults, please view:

• “Financial management among young adults – realities and strategies” (Perspectives Fall 2016 edition)
• “Building financial literacy among the younger generations” (Perspectives Spring 2016 edition)

3. Considering the value of information sharing and preparation

For many individuals who are thinking about or preparing to transfer wealth, a common overarching challenge is determining what information and details to share with heirs. Some are more traditional and conservative in their thinking and have concerns about potential negative impacts of sharing too much information (or any information at all). This is reflected in the “RBC WM 2017 Wealth Transfer Report” from both educational and preparation perspectives; for example, when asked about reasons for delaying financial education among the next generation, 31 percent cite their own lack of preparedness as a main conversation barrier; 27 percent don’t believe heirs are old enough; 15 percent don’t believe inheritors are ready; and, 13 percent aren’t comfortable discussing their own death. More specifically from a wealth transfer preparation standpoint, here again inheritors are often being left with a lot of unknowns. In fact, it was found in the report that only 33 percent of those who have received an inheritance were made aware before receiving any assets. And even when some discussions do take place, they often tend to be very limited or high-level in nature, lacking the depth and details for how individuals intend for heirs to use the wealth or explanations about wealth transfer structures.

Unfortunately for many, when there is a shortage of education or preparation, this may increase the likelihood of financial missteps, uncertainty around intentions, resentment as to why certain decisions were made and family conflict. All of these potential implications combined greatly reduce the chances that a legacy will be preserved. As such, it is critical to understand and consider the valuable impact and role of multi-generational knowledge when it comes to wealth transfer, and to find an approach to learning and information sharing that is most effective for your family. As part of the process, it is important to factor in individual and family circumstances, weighing in potential advantages and disadvantages before choosing the best approach that fits with family dynamics.

Source: RBC Wealth Management Special Report. “Five key questions to consider in estate planning and wealth transfer.”

4. Communication and defining family values

When the goal is to create a lasting legacy, it is vital to consider the significance not only of educating heirs in general, but also establishing and maintaining open dialogue to help ensure everyone in the family is aligned when it comes to values and intentions. Based on the “RBC WM 2017 Wealth Transfer Report” unfortunately it seems as though most Canadians aren’t recognizing this critical aspect, as it was found that only approximately half of respondents have started to discuss and educate the next generation on financial matters; 41 percent haven’t started yet, but intend to do so, and another 11 percent do not intend to carry out these discussions or impart knowledge at all. Furthermore, there is indication of overall discomfort with confronting the theme of wealth transfer directly, as only 40 percent of respondents feel comfortable sharing all the details with their beneficiaries, and just under half prefer to just talk more generally about the big picture of inheritance.

Here again, the hesitation towards initiating those discussions and opportunities for learning, and avoidance of thorough and open communication may have negative implications, often leading to a situation where heirs have unanswered questions, uncertainty and a lack of understanding, which then ultimately puts them in a weakened position to manage and preserve a lasting legacy.

One very effective method to consider in establishing open dialogue and maintaining communication is through family meetings, which also promote ongoing family harmony by providing heirs and other family members with a forum to share views, concerns or interests. From the perspective of the parent or individual who will be passing down wealth, these meetings also offer the opportunity to share intentions, reasons and context for decisions, and gain valuable insight from family members that may not have otherwise been known. Regular family meetings also present an ideal environment to develop and define family values, with input from all family members. Whether those values are focused on education, philanthropy, the arts, athletics, professions, or otherwise, they are often very beneficial as a source of overarching guidance to promote a lasting legacy — and not just for inheritors but for future generations as well. Tip: To help improve the effectiveness and direction of family meetings, consider building agendas and nominating a note taker to ensure the discussions are properly documented.

For parents, grandparents, guardians and other adults, a natural and common feeling among many when thinking about the future is wanting the best for the generations to come. These hopes are often tied to a range of areas within life, but are also quite present in wealth transfer and in creating a lasting legacy for younger family members. To help ensure these hopes and wishes come to fruition, it is vital to make the connection between knowledge, preparation and communication, and their direct impact on the ultimate success of wealth transfer and leaving a lasting legacy.