The great wealth transfer is currently underway: millennials/genz are finding some financial relief with some money trickling down their way from their boomer parents (this brings up an entirely different topic on the problem of generational wealth). For now, some millennials/genz have some money coming their way; this can go a long way to keeping some money in their pockets, given the absolute shamble of an astronomical cost of housing/rental market, sky-rocketing student loan debt, and a weak job market. Some millennials and genz are even getting “living inheritances” from their parents. The stigma that usually surrounds topics of dicussion around money and inheritance are slowly fading away – it’s no secret that income inequality is growing, and people are more open to talking about money, debt and loans. Having solid discussions surrounding inheritance and money can, at the very least, soothe any hurt feelings. You wouldn’t, for example, want one sibling questioning as to why he/she is getting less inheritance than another, so that’s why talking about it openly (no matter how uncomfortable) can really help out your family members.
A whopping $1-trillion is set to be passed down to millennials/genz in Canada by 2026. This unprecedented shift, happening one family at a time, creates the need for tailored financial advice. Obviously, parents are going to be wary about having their money being blown. This is why talking about money and the need to spend, save and invest it wisely is so crucial.
Wealth transfers are full of opportunities – and challenges. Keep these following strategies in mind to ensure a smooth process:
1. Start Open, Transparent Conversations Early:
One of the most vital, yet often overlooked, aspects of wealth transfer is open communication. When wealth transfer is shrouded in secrecy, it can lead to feelings of resentment and rumours among family members. It can cause fights and breakups. You may want to start by initiating the important (yet, somewhat uncomfortable) conversations surrounding money, your legacy, your estate plan, etc. Open and honest expectations for everyone involved means you’re off to a GREAT start.
Here are some steps to initiate those conversations, if you’re feeling uncomfortable:
- Regularly scheduled meetings with key members of your family (children, spouses, trustees)
- Discuss what you want to do with your money, your assets, your estate, and why
- You may want to involve a trusted financial advisor or estate planner to help ease into these (difficult) conversations
2. Drafting a Comprehensive Estate Plan:
A comprehensive estate plan includes a Will, trusts, a Power of Attorney, a Living Will, and other principal documents. It also involves a comprehensive strategy about minimizing estate taxes, and other important decisions regarding your assets.
Here are some steps to initiate the process:
- Create a Will: An important legal document, outlining where your assets will go when you pass on.
- Consider a Power of Attorney: An individual handles financial matters in the event of incapacitation.
- Living Will: Someone else makes healthcare decisions on your behalf.
3. Minimize your taxes:
Estate taxes can significantly reduce the wealth transferred to your heirs. Therefore, reducing taxes when it comes to planning your estate is integral.
Here are some steps to minimize taxes on your estate:
- Gift Tax Exclusions: You may want to gift a certain amount without paying taxes to various people
- Charitable Donations: Leaving items to charities in your Will, can help reduce taxes (which are deductible)
4. Succession Planning for Family Businesses:
Obviously, succession plans are necessary for family businesses to run. Without a succession plan in place, there is the possibility of a family business being poorly managed or falling apart without your presence.
Parents deciding upon their succession plan
Here are some steps to initiate the process of succession planning for a family business:
- Identify the best individuals to run your family business (a child, a star employee, etc.)
- Training and mentorship are provided to said potential heir to the business. Mentorship is key
- A succession plan with documented roles, responsibilities, etc., is all provided – a training manual, if you will
5. Financial Literacy:
Obviously, coming into a sudden inheritance can be both a windfall and a hazard – a windfall to help you out if you’re struggling financially, but it can be a potential hazard if you just end up blowing your inheritance. Whether it’s a “living inheritance” or an inheritance your children receive upon your death, follow the steps below to help guide your family:
Here are some steps to initiate the process:
- Encourage your children to attend financial planning sessions – they’re not only for the rich
- Plan strategies through your trusted family’s financial advisor; someone who your children (or heirs) can depend upon. Later, they can switch to a different advisor, if necessary
- Instill certain values: fiscal responsibility, philanthropy, prudent investments, wealth preservation
6. Review and Update Your Plan Regularly:
Life changes, and so should your estate plan: review it on an annual basis (don’t try to leave it on the backburner – we have had many clients who often leave creating their Will, Power of Attorney and Living Will to the day right before a vacation). Make sure everything is properly written out – don’t rush it!
Here are some steps to initiate the process:
- Review your estate plan on an annual basis – perhaps once a year
- Discuss modifications with your financial advisor, to keep abreast of changes in the law
- Coordinate and discuss changes to your plan with your family members, so there are no surprises
An intergenerational philanthropic strategy:
This isn’t really part of your estate-plan, but you may want to look at the importance of philanthropic giving.
Philanthropic giving towards charities or causes you really respect or admire is always a good strategy of estate planning. It’s about giving back, and shows your loved ones the importance of being charitable.
You can have a open and honest discussion with your family members about which causes they would like to support and why. How much of your estate would go to those causes? This can bring everyone together in the estate planning process as well.
You may want to read more about easing into smooth wealth transfers, here.