There is a great intergenerational transfer of wealth taking place as Baby Boomers start to pass on their assets. It’s important that you and your family have a plan for handing down your wealth.
Nearly 80% of the UK’s private housing wealth is held by over-50s, according to research released by Savills this year. Baby Boomers over the age of 65 are best off in this group – they own a collective £2.7 trillion in housing stock, most of which is mortgage free.
Looking more broadly, figures produced by the Office for National Statistics’ Wealth and Assets surveys showed that over-65s held 36% of the total household wealth in the UK in 2016 – the latest data available at the time. One in five of over-65s in the UK was a millionaire at that point.
This shows the significant wealth held by Baby Boomers in the country. And it points to a vital consideration: we are starting to see this property being passed on to the next generations.
This is something that families need to manage carefully, as the transition of wealth involves a complex mix of money, relationships, expectations and emotions.
A positive approach
Handing down your wealth to your children and grandchildren should be a source of pride and pleasure. However, it is often complicated, and can unfortunately lead to a great deal of mistrust and even discord.
It is also not guaranteed to make a lasting positive impact. In fact, research published in the Journal of Family and Economic Issues in 2012 found that “roughly half of all money inherited is saved and the other half spent or lost”.
Studies suggest that what is important for families to consider is that transferring wealth should be about more than just the money. In 2017, a paper in Social Science Research noted that “educational attainment and family formation determine whether or not households are able to convert inheritances into greater assets, facilitating improved wealth accumulation”.
In other words, families who successfully retain and grow their wealth from one generation to the next have an appreciation of the values behind financial wellbeing. And they generally approach this in three key ways:
Communication
The most important element in successful intergenerational wealth transfer is effective family communication. Having transparent discussions about estate plans, inheritance, and financial matters can help avoid misunderstandings, conflicts, and potential legal disputes among family members, and ensure that values are shared.
These conversations should be initiated long before any wealth transfer actually takes place. Only broaching the subject once it has become a reality may lead to rushed decisions and emotional tensions.
All relevant family members, including spouses, children, and other beneficiaries should be included. Each individual’s perspectives and concerns should be heard and acknowledged. Often it is useful to appoint a facilitator like a trusted financial adviser to guide the conversation.
Crucially, the values, goals, and intentions behind any estate plan should be clearly articulated. This creates a shared understanding among family members.
Consider fair versus equal distribution
Deciding how to distribute wealth among heirs can be a complex process. Some individuals may choose to divide assets equally, while others may distribute assets based on individual needs, circumstances, or contributions to the family.
Striking this balance can be hard, and create the potential for resentment and conflict. But it is important to take into account the individual financial situations and needs of each heir, and communicate clearly how decisions are reached.
Some family members may require more financial support than others, and equal distribution may not necessarily be equitable. Others may have been supported more in the past, and that can be taken into account as well.
Always be mindful of aligning the distribution of assets with the family’s values and intentions.
Preserve family values
When intergenerational wealth transfer is approached positively, it is not solely about the transfer of financial assets. It also involves passing on family values, traditions, and legacies.
To guide this process, it may be useful to create a family mission statement that reflects the family’s shared values, principles and goals. This statement can serve as a guiding compass for how future generations manage the wealth they receive.
Encouraging philanthropy and charitable giving is one way of making this practical. If younger generations are involved in these initiatives, they are also more likely to continue supporting them.
By appreciating these three key aspects of family communication, distribution considerations, and preserving family values, individuals can facilitate a successful and meaningful intergenerational wealth transfer — one that goes beyond financial assets and leaves a lasting legacy of financial wellbeing for future generations.