Talking to your children about wealth transfer

Intergenerational wealth transfers regularly go awry due to poor communication between family members. This guide is designed to help you have constructive conversations with your family about wealth, responsibility and legacy.

Almost four in every five Australian private banking clients are worried about how they’ll transfer their wealth to the next generation, according to RFI Global. In a study, the research house found many Australians are concerned that trust and communication between family members could erode throughout the process.^disclaimer

It’s easy to see why so many are fearful – according to research by US private wealth consultancy The Williams Group, roughly 70% of wealth transfers fail, with 60% of these failures attributable to breakdowns in trust and communication between family members.^disclaimerIt’s a startling figure, and one that highlights the often complex and emotionally fraught nature of succession planning.

If communication breakdown is a leading cause of failure, then open and frank conversation is likely to be one of the best remedies. In ANZ Private’s experience, this is often true.

Even so, it’s important to understand that not all frank conversations are effective.

We believe, to be productive, the conversations you have with your family about wealth and succession need to tease out actionable details. You can then use these to construct a plan that suits everyone’s goals.

Key points to address

Although every wealth transfer plan will be unique to a family’s particular circumstances, there are some common considerations.

These include:

• how and when wealth will be passed from one generation to the next;
• which legal structures best meet the needs of future generations; and
• how to accommodate ‘lumpy’ assets so they can be distributed to multiple heirs in equal portions.

Solving these issues is the foundation for successful planning and should form the basis of conversations with your family.

Long-term aspirations

The purpose of planning is to ensure the greatest likelihood of achieving your goals. It’s important to be clear what those goals are, and how they align with your heirs’ ambitions. You’ll have your own vision for your wealth but be willing to listen to your family’s ideas and try to find ways to accommodate their hopes as well.

Heir preparedness

Managing wealth requires significant skill, and many young Australians fear they’re not ready for this level of responsibility. Your initial conversations about transferring wealth are a perfect opportunity to discuss how confident younger family members feel about this and what you can do to help them prepare for the future.

Demystifying distributions

Wealthy families may have ‘lumpy’ assets that can’t be neatly divided and spread among children. These can include businesses, properties, artworks, vintage cars, or other collectables. Some assets may have sentimental value for your heirs that outweighs their financial worth.

It’s important to discuss who these assets will be left to and the reasons why. Addressing this issue early gives everyone a chance to express their views and reach an amicable arrangement, rather than being caught by surprise later down the track.

Family business

Sometimes the next generation may not fully understand their family’s wealth – how it was built, how it’s structured, and what’s been said about it outside the family. Although it may be important to maintain some degree of privacy about more sensitive details, it’s vital you know how much your children understand and what else they should be made aware of.

How and when to start the conversation

More than half of private banking clients with children believe it’s appropriate to start discussing wealth succession with their children before age 21, according to 2021 research for ANZ.^disclaimerFamilies may even introduce their children to private bankers and financial planners at a young age, so they become more familiar with wealth management.

There is no hard and fast rule governing the best age to begin these conversations, however. Although it makes sense to begin speaking to your children sooner (to better prepare them), consideration should be given not only to their age but also to their maturity.

Some people may be ready to start these conversations as teenagers, while others may need more time before they fully understand the issues at hand.

Once you’re comfortable that your children are ready, and you’ve outlined your own vision for your family wealth, you can begin these sorts of conversations.

How you handle this will depend on your relationship with your children. The first conversation can be relatively informal and simply pave the way for future talks by giving your children an insight into both your wealth and your goals for the future.

As these conversations become more detailed and your family gets closer to settling on concrete plans, it may be in your interest to treat them more formally. Some private banking clients bring in a third-party mediator to act as an objective observer during these meetings.

Suggested conversation starters:

These questions can be used to start conversations with the next generation about wealth transfer, succession planning, responsibilities, and legacy. This is not an exhaustive or prescriptive list but can be a starting point for your own conversations. 

Remember to keep your questions open-ended and take the time to listen to your heirs’ responses in detail – they may offer insights into your succession plan that you hadn’t previously considered.

Conversation starters:

• What are your long-term goals and aspirations? How do you plan to achieve them?
• What do you think you’ll do with any money you inherit in the future?
• How prepared do you feel to manage our family’s affairs/business/wealth?
• How would you like to see our family’s wealth managed into the future?
• I’d like to start including you in our family’s wealth planning. What responsibilities would you like to take on?
• What are your biggest money concerns right now?
• How can I help you prepare for the future, both personally and financially?

Keeping the conversation going

Succession planning is a dynamic process. No matter how sound your initial plan is, over time it may need to be tweaked and adjusted as circumstances change.

To give your plan the greatest likelihood of success, you should conduct regular reviews. These reviews should include meeting with your family to discuss whether situations have changed and, if so, what that means for your wealth transfer plans.

There is no rule about how often these meetings should occur, although many families choose to check their plans at least annually. In addition to these scheduled meetings, major life events such as the birth of a grandchild or a divorce in the family warrant additional reviews.