A recent issue of ADVISOR.CA, an online news source for Canadian financial and wealth advisors, reported a discussion held by an expert panel at the CFA Society annual wealth conference in Toronto.
The panel included Chantal Copithorn, senior manager of tax at PWC Canada, Susan Fulford, chief legacy officer at Dynamic Legacy Inc., and Tom McCullough, chairman and CEO at Northwood Family Office.
During the discussion they shared insights about how to make sure next-generation clients are financially literate and psychologically confident enough to deal with the massive transfer of Canadian wealth that is poised to occur over the coming years.
$750 billion on the move
According to Benjamin Tal (Canadian Imperial Bank of Commerce deputy chief economist) as reported in the Financial Post (June 6, 2017) story Bequest Boom, Canadians between 50 and 75 years old are poised to inherit $750 billion over the next decade alone.
While the scale of wealth on the move is well know, what is much less well known is just how unprepared the majority of Canadians likely to be affected by this transfer of wealth actually are. Frankly, the news is troubling.
Wealth Transfer Report 2017
Specifically, the panel discussed at some length the findings of a recently published study originating from RBC Wealth called Wealth Transfer Report 2017. The survey included 3,105 individuals in Canada, the UK and the US.
Respondents were worth, on average, $4.5 million USD and included professionals, entrepreneurs, business owners and retirees. To quote directly from the first three conclusions contained in the report’s Executive Summary:
- People are generally unprepared to give or inherit wealth. Only 26% of respondents have a full strategy in place.
- 1 in 3 benefactors have done nothing at all to prepare for passing on wealth to the next generation.
- People are more likely to have a wealth transfer strategy if they have received through inheritance. 32% of previous inheritors have a full wealth transfer strategy, compared to only 15% of those who have yet to inherit.
The Report went on to state: “What we found was a remarkable gap between intention and action, resulting in a general lack of preparedness. Our research shows that individuals have every intention of transferring their knowledge to the next generation. However, it turns out that many families are repeating the cycle of inadequate financial guidance, delivering too little too late. We found that on average, structured financial education is only beginning at age 27.”
The panel identified three key issues, or pitfalls, that many people will have to confront in the wealth transfer planning process.
Pitfall #1: Heirs being unprepared to handle or manage inherited wealth.
For wealth to be transferred successfully, clients need to focus on boosting the financial knowledge of receiving generations. Structured financial education often doesn’t take place until individuals are well into their 20s. This is dangerously late. It’s never too early to start educating family members.
The panel agreed that a wealth advisor is uniquely placed to provide access to financial literacy resources and promote ongoing dialogue with heirs by facilitating family meetings and assisting with creating family financial inventories – long before estate plans are finalized.
Pitfall #2: Personal wishes or biases driving wealth-transfer decisions.
Clients need to understand the pros and cons of passing down wealth during their lifetime versus upon death. The panel offered the example of a couple entering into retirement without developing a wealth-transfer plan.
While they’ve decided to not pass down any of their wealth during their lifetime, due to their fear of not having enough to fund their lifestyle until death, they’ve also failed to craft a plan and update their heirs on this decision – leaving those heirs in the dark.
The panel agreed that nothing beats a plan. And no one is in a better position to develop such a plan – and work with all parties involved to ensure its acceptance – than a wealth advisor, particularly one skilled in handling estate, trust and related intergenerational wealth transfer issues.
Pitfall #3: Dealing with a unique, complex and/or stressful family situation.
This is, potentially, the trickiest issue of them all. It is also where the participation of an advisor can be decisive. By being scrupulously objective, tactful and fair, an advisor can:
- Demonstrate that options exist to effectively suit every unique need.
- Reinforce the importance of communication and open dialogue to promote family peace-of-mind.
Wealth never survives three generations
Remember the famous Chinese proverb: ‘Fu bu guo san dai’ (Wealth never survives three generations). When it comes to wealth, many families spend a lot of time and energy building it, but far less focus on how it will be passed on.
A majority of high net worth families fail to successfully transfer assets from one generation to the next, resulting in not only a loss of control of those assets, but a loss of family harmony. Try not to let it happen to you.
The Wooding Group, 780 498-5047