Paul Clitheroe's Making Money: Managing your own intergenerational wealth transfer

Chances are you’ve heard about the ‘great intergenerational wealth transfer’. It refers to the $3.5 trillion in wealth that Aussie baby boomers are expected to pass on to younger generations over the next 30 years^[1].

Knowing you are in line for a valuable bequest can be financially reassuring even though an inheritance inevitably goes hand-in-hand with the loss of a loved one.

However, as Australians are living longer many people won’t receive an inheritance until they are older themselves. The Productivity Commission says 70% of inheritances go to people aged in their 50s and 60s. By that stage, the big money challenges like buying a home or raising a family are usually behind us.

Sadly, knowing there is money waiting in the wings can bring out the worst in people. So-called ‘inheritance impatience’ is believed to be behind a rise in elder financial abuse.

Research[2] shows that among those who have experienced this type of abuse, the most common issue is being pressured into giving or loaning money, possessions or property – typically to an adult son or daughter facing their own financial struggles.

A number of banks are tackling elder financial abuse head on. CommBank for instance has introduced automatic filters that block abusive, threatening or offensive words in digital payment transactions[3].

Exactly why anyone would add abusive comments when making a digital transaction is a bit beyond me, but I’m very supportive of anything that helps with elder abuse.

Fortunately, the reported levels of elder financial abuse are low, experienced by around 2% of our over-65s[4] though not everyone reports this type of abuse.

Nonetheless, the issue raises questions about how we manage, protect and even share our wealth as we age.

Giving with a warm hand

Australians are embracing the concept of ‘giving with a warm hand rather than a cold one’. In other words, helping out adult children – and grandchildren – while we are still alive, with money that could be seen as an early inheritance.

If you have the financial ability to do so, it can be very rewarding to help a close family member buy a first home or first car, or help pay for their tertiary studies or lend a hand paying for grandchildren’s school fees.  

Or you may opt to set up a portfolio of investments for a youngster to give them a financial head start. 

The key is to think carefully about how much you can realistically afford to give especially if your retirement savings are a little leaner than you’d like.

None of us know how long we will live for, and it’s important not to feel pressured to hand over more than you are comfortable with. Be aware too that gifting money has the potential to impact age pension entitlements.

Power of attorney – forward planning while you still can

Your estate plans play a central role in transferring wealth to the next generation.

Having an up to date will is important, particularly if you have children, significant assets or if you have strong ideas about how you want your estate divided up.

The thing is, a will only takes effect following your death. There can be times when we are still very much alive when we need someone to act on our behalf.

The elephant in the room here is dementia, which is now the second leading cause of death in Australia (after heart disease)[5]. The physical and mental toll of dementia is well known. What’s less understood is the potential for dementia to dramatically impact your financial wellbeing. If you are unable to sign documents for example, it can be very difficult for a family member to informally manage your money for you.

To overcome this problem, the law recognises a document called ‘enduring power of attorney’. It sets out the powers you give to someone else (the attorney) to act on your behalf if you become physically or mentally incapacitated.

Establishing power of attorney is a key component of effective estate plans, though think carefully about the person you give power of attorney to. Their role is to represent you when you can’t do so yourself, and it can confer the power to buy and sell assets, manage your business interests, and sign important documents such as contracts on your behalf. So, pick someone you trust because the action they take is binding on you.

I recommend having a chat with your legal expert about introducing power of attorney to your estate plans.  It’s not just a way to help prevent elder abuse, power of attorney can allow you to lend a hand to the next generation while you’re alive if that’s what you choose to do.