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A legacy of wealth for the next generation

The wealth of the world is changing hands. As part of the biggest wealth transfer in history, as much as $65 trillion is estimated to trickle down the generations in coming years, as those who created or grew the wealth give way to those who will inherit it.

It’s a change driven by demographics, as ageing millionaires and billionaires decide to retire, hand over the reins to the family business, or pass on, leaving the wealth to their children and grandchildren.

And the numbers involved are staggering.

By 2030, it is estimated that $15 trillion at least will change hands from the wealthiest members of the Baby Boom generation to Gen Xers, currently in their 40s and 50s, Millennials, in their late 20s and 30s, or skip a generation or two into the hands of the group known as Gen Z.

That’s a portfolio five times the size of the German economy and on par with the economic clout of China.

“The likes of Zoom are not particularly well suited for the personal wealth planning side of things. I think there’s something about the value of being face to face.”
– Nigel May

For those considering their living and posthumous legacy, the goal is to have the wealth at least partially in the hands of later generations while they are still able to direct how and where it might be distributed or spent.

But estate planning remains a stressful time, and while Covid-19 has brought home to everyone how vulnerable health really is — the virus has, conversely, put a pause on many plans.

Tax partner Nigel May, from MHA MacIntyre Hudson, says predictions early in the pandemic that Covid-19 would accelerate the rate of wealth transfer have not been borne out.

“If we go back to March, I think there was a presupposition that there would be a whole load of activity from a private wealth perspective as people had an increased sense of mortality,” he says.

“And while they may be feeling that personal mortality, we haven’t really seen activity increase.”

A combination of fear and uncertainty may be to blame.

Specialist wealth tracking agency Wealth X estimates an average $10.2 million will be transferred in coming years by high net worth individuals worth $5-30 million each. For those with $30 to $100 million to share, an average $51 million will be passed along.

Once you cross the magic $100 million threshold into the ultra-wealthy, though, the average wealth transfer is a remarkable $400 million.

That’s not the kind of money transfer that can be negotiated quickly, Mr May says, and probably not over a video call.

“The likes of Zoom are not particularly well suited for the personal wealth planning side of things. I think there’s something about the value of being face to face,” he says.

“Certainly, the first client meeting that I had after our first lockdown was private wealth-related and it was that the client needed the physical meeting to have the conversation that was necessary. For the intensely personal nature of planning for the succession of your wealth, basically newfangled media does not particularly work.”

Wealth advice more complex than ever

Ian Halligan is firm leader in the area of Expatriate Tax and High Net Worth International Tax for Baker Tilly United States, and has also seen the strange inertia prompted by Covid-19.

“If people were thinking about moving to jurisdiction X or Y to retire, it’s moved that timeline up,” he says.

“I’ve had clients say to me, I wanted to buy this ranch, and now it’s become mission critical for a 53-year-old, whereas previously it would have been a decision 10 years along the event horizon.

“But there are a lot of things where the complexity of the virus has caused people to take a pause because they just don’t know how this is going to play out.

“They just don’t know where this might land in 12 months, in 18 months, in two years. It seems to have pushed people to be extreme. Either it has pushed them to make the decision they were on the brink of making, or push them to press pause on everything.”

“Covid seems to have pushed people to be extreme. Either it has pushed them to make the decision they were on the brink of making, or push them to press pause on everything.”
– Ian Halligan

While Covid might be playing a part in the pace of the wealth transfer, more significant for advisors is the change in expectation of wealthy clients.

Gone are the days where presenting a portfolio of investments would be enough to reassure HNWs that their investment was wisely employed. Now, the role of a wealth advisor is far more complex and must accommodate very different demands across generations.

Wealth advisor Charlie Viola, based in Sydney for Pitcher Partners, focuses on clients who have liquid assets of up to AUD $250 million (USD $200 million), including first-generation business people who have created their wealth and now want to ensure the next generation can benefit.

But they are also anxious not to damage the prospects or ambition of their children and grandchildren by making life too easy.

“We have a lots of conversations with our clients who say they want to be able to get their wealth to their kids ‘without ruining them’,” Mr Viola says.

“I had a client with about $120 million in investable assets, for example, who was first generation high net worth, an investment banker with kids from two marriages, who wanted to share his wealth.

“But he didn’t want to just give them $50 million each because that would destroy them – it would take away their opportunity to work and learn and sap their own ambitions.

“So instead he put $15 million into a private accelerator fund, made the kids directors of that, and gave them the responsibility to look at how they would choose to invest over a period of time.

“It’s a good example of what we see with intergenerational transfers, because the next generation will end up with the money but not all at once.”

“Some really have no idea how much money their mum and dad own, until you sit them down and take them through it.”
– Charlie Viola

Mr Viola says the amount of money available often determines the nature of estate planning, and clients are acutely aware they can’t dictate the use of the money from the grave.

“You have the camp of people who have $10 million or $15 million or less who primarily want the kids to get the money, with some protections against things like divorce or relationship breakdown, and that’s about it,” he says.

“They you have those people who have $25 million to $100 million, where they are genuinely trying to create a legacy and want structures put in place to ensure that intergenerational wealth will grow — $100 million to $400 million to a billion over the generations.

“For the latter group, there is a big education process for the next generation that we go through; a structural conversation around how we’ll hold those monies, and an education piece on how to involve the kids in planning, caring and building on the work the parents have done.”

Mr Viola says negotiations with next gens in their late 20s to early 40s can be challenging at first.

“Some really have no idea how much money their mum and dad own, until you sit them down and take them through it,” he says.

“When you have Millennials who are going to be involved, the education starts reasonably early and we get them perhaps to be directors on trustee companies or involved in making investment decisions in philanthropic areas.

“But Millennials tend to be very well educated, they’re very good with technology, and they are better spenders and savers than the older Generation X.

“They are also very driven: they care about where the money is invested and why, the purpose of what they are doing, and knowing that they are not damaging the environment or making investments that do harm.”

Protecting assets for future generations

Mr Halligan has seen a similar shift in the interests of the next generation, who may see wealth as an enabler rather than a goal, and who have grown up expecting a borderless world.

“There’s a certain clientele that you would call a fiscal nomad,” he says.

“They tiptoe around the world, they don’t spend enough time in any jurisdiction to become a resident, they might not be living on a cruise ship, but they spend two months in one country, two months in another, then a month somewhere else.

“In terms of the wealth transfer discussion, 20 years ago it was just generational planning. You’d have the parents build the family business and they would give it to the three kids. It was very binary, it was logical, it was linear — and the planning was straightforward.

“Now the kids don’t want to be involved, they want to go snorkelling in the Bahamas, and so it is about planning for those types of lifestyles, where they don’t want to actually take over the family business.”

Those expectations can be personally motivated, but they can equally be driven by the desire to invest in social enterprise, environmental projects, philanthropy, or other causes.

“It used to be about inheriting the family business. It was very often that the kids would go into law if dad or mum was a lawyer. Going into medicine if dad or mum was a doctor. Now they’re doing all sorts of different things,” Mr Halligan said.

“On some level, it’s a sense of finding their own way in the world, but through social media, for example, or some other technology, or just going to go and write a blog about surfing in Hawaii.

“Succession planning used to be the majority of the work I did in the wealth space, but it is probably less than half of what I do now. The conversation is now about how we protect the assets for that generation as they go and live in Bulgaria or China or wherever. That’s just the way the world’s changed.”

Winning over wealthy Millennials

Managing the wealth of Millennials is vastly different to the traditional investment services accountants and advisors once provided.

While the grey-haired wealth advisor was once the recognised expert, the only one able to reveal market movements or asset values, that knowledge is now freely available — and it is their ability to assess risk, weigh options and make strategic recommendations that is now prized.

“Once advisors could meet their clients every three or six months, provide them their portfolio valuations, and that was it — they were the expert and the client took their word,” says Pitcher Partners wealth advisor Charlie Viola.

“But with younger wealthy clients the access and appetite for information is huge. Anyone can do a Google search and get an analysis of an investment, so as an advisor you need to be providing value in other ways.

“You need to support your clients in accessing the information they want when they want it — everything online, everything interactive, everything open for discovery. These are tools they have in every other part of life, and they want them from their wealth advisors as well.”

Mr Halligan said there is also a shift away from technical advice to a more holistic approach.

“The clients want more in terms of the advisory side,” he says.

“They still want a boilerplate for how you do the wealth transfer, here’s the boilerplate for how you set up the trust, here is the boilerplate for how you get from A to B.

“But what they really want is more creativity in terms of being able to say, this is what I want in my lifestyle, here are the places I want to live, here are the things I want to invest in. How do I do that and still protect this nest egg?”

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Meet the experts

Ian Halligan

Baker Tilly United States

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Nigel May

MHA MacIntyre Hudson

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Charlie Viola

Pitcher Partners Australia

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