Next generation stands to inherit $1 trillion – but parents have a problem

This article was originally published on the BusinessDesk website.

It has been estimated that around $1 trillion of wealth will transfer over the next two decades in New Zealand.  That means those who have worked hard to create or steward wealth face another tough task – broaching the topic of wealth transfer with their children, according to experts. 

Based on Reserve Bank of New Zealand and Statistics New Zealand data, this figure shows the stakes are high, says Craigs Investment Partners’ Paul Burns, as a legacy of success and the passing of the baton from one generation to the next can easily turn from a source of security into acrimony.

“There’s no shortage of stories of family members battling it out with lawyers and the involvement of the courts over what should be the source of a financially secure life,” the Christchurch-based investment adviser says. “When this happens, it can represent a breakdown of good practice for managing intergenerational wealth transfer.”

It also erodes value, sometimes quite considerably, and in extreme cases can cause a collapse of the family unit.

Burns says there is, to some extent, a responsibility of heirs to preserve what their forebears have built for them. However, this responsibility starts with parents:

That’s where some of the many challenges apply. While it’s about money and property on the face of it, inheritance is also about values and expectations.

But values change over time; for example, Burns says many older Kiwis, particularly Baby Boomers, have an unrelenting focus on hard work, discipline, and if not parsimony then modest spending. “We have clients who keep building their assets, never enjoying what they build. That’s changing to an extent, where the next generation wants to enjoy certain lifestyle assets.”

Another potential difficulty comes with the wealthy Kiwi who flies under the radar, driving an old ute, maintaining a low profile and low-key lifestyle while quietly sitting on millions. “We’re a lot less like some other countries,” says Burns. “Flash is vulgar for many older people.”

Such challenges can contribute to the sensitivity of discussions around wealth and succession. However, such discussions – which go beyond numbers, economics, and the mechanisms of value creation – should start as early as possible.

“The next generation should understand what their inheritance means and what it does not; real care must be taken, as you don’t want to create any expectation that there’s no need to follow a career and stand on your own two feet financially,” says Burns. “Encourage financial independence, while sharing how money is managed, growing an understanding of finance and things like the power of compounding – but appreciate there is a lot to understand and learn, so it takes time.”

Family gatherings around the holidays are a good opportunity for such discussions, he says, and the lines of communication should always be open and ongoing. “And thorough. We’ve seen cases where some siblings actively engage with parents on finances, while others don’t. This results in uneven expectations and potential problems down the line.”

On that note, he says the presence of wealth and an inheritance comes with an equal presence of expectation, emotion, and conflict. Careful and thorough management is necessary, and clarity is the responsibility of the parents. 

“Avoid the carrot and stick approach, where wealth is used either as an incentive to encourage desired behaviours or goals, or as a threat discouraging certain courses of action,” Burns adds, pointing out that benefits are typically short-lived, while resentment is often permanent.

He also advises bringing children into discussions with wealth and investment advisers: “We get to know clients and build trusted relationships. While it does depend on the stage of life a client is at, we like to work with the children, so they too know what we do, how we do it, and the value we create by looking out for the best interests of the family and its heirs.”

Things can go awry when a sudden illness or other catastrophe accelerates the necessity for succession. This, Burns stresses, underlines the importance of planning early and thoroughly, while staying on top of the documentation such as wills and trusts. 

“Friction is created when it’s unplanned and unexpected, with no groundwork. Where there’s uncertainty, problems are likely. Good planning means keeping everyone on the same page, knowing the shared goals and values, and facilitating a smooth transfer.”

He takes satisfaction in seeing wealth retained in families who’ve contributed significantly to New Zealand through their efforts, often passing on the work ethic along with property and possessions. “Knowing their wishes live on, knowing that they are looking after their children even after they’re gone, saying ‘Your parents would be proud’ – that’s precious.”

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