Transferring Your Wealth to the Next Generation: A Significant Challenge

Economists believe that we are now experiencing the most significant intergenerational wealth transfer in history. It may be the time to your children about your own wealth transfer and build a strategy. 

According to the latest global developed Market figures, almost 22% of the working-age population is now approaching retirement. This isn’t surprising, since the youngest members of the baby boom generation will turn 65 in 2031 when the oldest baby boomers will reach age 85. At that point, almost everyone in this huge demographic cohort will be retired. 

In many cases, they will also find themselves in possession of significant wealth that will eventually be at least partially bequeathed to the next generation. 

If you are part of this generation, you and your families share a significant challenge: how will you ensure a smooth transfer of this wealth to the next generation? Be aware that according to recent academic studies, a mere 30% of intergenerational transfers are successful – a successful transfer being one where the family retains control of the assets and family harmony is preserved. 

Furthermore, almost all unsuccessful transfers seem to involve a failure to prepare the heirs, a lack of communication, and the absence of a shared vision.

What are the Main guidelines for Wealth Transfer?

Communicate: Professionals generally recommend opening a dialogue with all family members to let them know the state of family finances and your intentions. Unfortunately, this is often more easily said than done: many families – and even many couples – aren’t comfortable talking openly about their financial assets. The primary benefit is to create a shared vision and values that will facilitate the transfer of wealth. 

Obviously, this is not without risk. For example, disclosing the assets to be inherited can have a demotivating effect on your children when it comes to their own individual challenges. It could also create expectations about how they might use these assets if you were to make a partial transfer during your lifetime. In fact, about two out of three Families would consider transferring part of their legacy during their lifetime.

Educate: The level of financial knowledge varies greatly from person to person. Within a couple, for instance, it often happens that one person ends up making most of the financial and investment decisions. 

So, it might be necessary to help everyone involved, starting with the spouse, to develop an adequate level of understanding, by their age and education, of course.

At this point, you might find yourself faced with differences in values. Indeed, recent studies tend to show that millennials, for example, have a view of the financial world and a sense of investment risk that is very different from that of earlier generations

Outside specialists, including your advisor, may be able to clarify some issues for the benefit of all concerned and direct you to the right educational resources.

Plan: Finally, once all the variables are looked after, there’s the matter of planning the transfer. You can transfer wealth during a lifetime, after death, (through a will or trust), or both. It’s critical to examine the tax implications of every decision. Specific financial tools, such as life insurance, may be able to offset the amount of taxes deducted at death.

The Challenges of Transferring International Assets

Not so long ago, transferring assets and foreign business equity was a straightforward exercise that usually was undertaken late in the process of transferring wealth.

For taxation purposes, assets and were typically assessed based narrowly on legal ownership and domicile. Lately, the new directives for AML (Anti Money Laundering) have made this process very complicated. 

Tax authorities are becoming more aggressive in questioning tax valuations and where tax should be paid, and this will include: 

  • Imminent plans for greater information sharing between national tax authorities.
  • Greater scrutiny and higher substantiation standards for tangible and intangible assets.
  • Emphasis on linking asset and business entity valuations with documented value creation across the entity 
  • A DEMPE (development, enhancement, maintenance, protection, and exploitation) framework is the preferred approach for evaluating and defining functions within an organization before beginning to value intangible assets such as intellectual property.

Most Family Businesses Will not Survive Beyond the Second Generation of Heirs 

Planning is especially important if you own a business. Statistics show that almost half of family-business bankruptcies are precipitated by the death of the founder. And over the longer term, it seems that most family businesses are not likely to survive beyond the second generation of heirs. 

The intergenerational wealth transfer now underway could have a noticeable impact on our economy and the markets. But if you are involved in it, you might initially feel the impact on your own wealth and that of your loved ones. It is highly advised to seek professional advice. 

About the Author
Dan Dobry was the founder and a director of the GlobalNET Investment House, he was one of the founders of the Union of Financial Planners in Israel (UFPI) and served as the first Chairman and President of UFPI. Dan was the Global Council Representative for Israel for the Global Community (FPSB) from 2012 - 2018 and was a member of the Committee for Standards and Qualifications for the European Union (SQC) until December 2021.
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