The hardest part of passing on wealth is talking about it

This article was originally published on Newsroom.

From handing over the farm to avoiding ‘trust fund babies’, inheritance and succession planning can be far from simple.

The biggest threat facing New Zealanders ahead of an inheritance boom isn’t tax policy, but their own discomfort talking honestly about money.

Quinton de Bruin, who advises clients on business succession and retirement at Craigs Investment Partners, says people often put off difficult conversations, underestimating the complexity of transferring wealth, especially when a farm or family business is involved.

“That complexity grows when there’s more than one child,” de Bruin adds.

A generational wealth transfer is underway in New Zealand. It’s estimated NZ$1.6 trillion will be passed on, largely between Baby Boomers and Generation Z or Millennials, over the next quarter-century in a shift that’s become known globally as the Great Wealth Transfer. 

As a record level of money and assets moves between generations, New Zealand families within all financial brackets are having to think not only about what they pass on, but how well prepared the next generation is to receive it.

De Bruin says for the preservation of relationships, things need to be fair and equitable – which doesn’t always mean equal. 

Fair versus equal

“Complexities can arise when, for example, one of the children works in the family business or on the family farm and there are two other children who are not involved in the family business or farm.

How do you make it fair in that scenario and how do you do the succession planning? Very often the primary wealth-generating tool that needs to be passed on, such as a business, might have a clear plan but the challenge is looking at how one accounts for the sweat equity invested by those children involved in the business and at the same time look after the other children.

Parents have this feeling that everything needs to be fair and equitable, which doesn’t always equate to equal.

“The complexity is really in the emotional side of things more than the transactional side of things.”
Fewer inheritances are equal in their treatment of successors as time goes on, de Bruin says, largely because the next generation is “getting on with their lives” and not necessarily following in their mum or dad’s footsteps. 

This means when a sibling has taken on the business, there needs to be recognition and allocation for work already done. 

The logistics of passing on or selling a business are typically more complicated and time consuming than the sale of a residential property, which can be quite quick to shift, de Bruin states.

For a successful succession plan to be implemented and executed for a business such as a farm, these discussions can often commence anywhere from 10 years leading up to the succession event, depending on the complexity of the plan, the number of parties involved and the nature of the business, he says.

Alongside businesses, family homes and beach houses create difficulties. These are typically emotional in nature, rather than logistical, de Bruin says.

This is something Juliet Moses, partner at trust and private client law firm TGT Legal, has seen play out over her two decades in the field. 

A lot of her work involves navigating family dynamics and psychology and sometimes “it’s not really about the money at all,” she says.

“Holiday homes can be quite a big thing. Sometimes even more than the family home, there can be that real sense of attachment or sentimentality, because you know that’s where they had all their Christmases, and then it can get really complicated when some people live out of town or out of the country.

“So it’s gone down to the next generation, but some of them actually don’t want it. They’d prefer to cash out.”

Avoiding entitlement

Moses says a tension can play out within families between wanting to educate and inform offspring about the family coffers and how to manage wealth and not wanting to engender a sense of entitlement or expectation in the next generation.

“That can be quite a balancing act because they don’t want their children to kind of be trust fund babies who think: ‘Oh great, now I don’t have to work hard and I don’t have to go to university because I’m going to end up with all this wealth eventually’”.

However, at the end of the day, how the next generation uses inherited cash and assets isn’t entirely in the benefactor’s control.

“I often talk to my clients about the tension between not ruling from the grave but also wanting to leave things nice and tidy and trying to avoid leaving things in a mess for the next generation, so that they’ve got legal issues or disharmony.”

Things don’t always happen as one expects – and Moses says “out of order deaths”, relationship breakups and incapacity can bring with them a whole raft of problems. 

Several changes in the landscape have shifted how things play out in inheritances over the years, Moses says, including reforms to the Property (Relationships) Act in 2019, our ageing population whose working life and retirement years are expanding and the increasing proportion of blended families.

“There might be children on one side or both sides from prior marriages, they might have a child together. There’s all sorts of different permutations which can get really complicated and can cause quite a bit of friction between the husband and wife when they’re thinking about how they’re going to divvy up the wealth and transition it down to the next generation.”

On planning ahead, Moses says: “Some people bury their heads in the sand and don’t want to pay lawyers’ fees or just want to ignore the problems or the risks or uncertainties because they know it’s hard. It can be quite confronting and can cause arguments within the family. 

“But it’s almost always better to deal with that stuff now than to leave it till later.”

Protect your retirement

While some families may put off talking about passing down wealth, others address the topic with early giftings.

De Bruin says before engaging in this kind of giving, it’s wise to work backwards.

He advises determining the savings needed to be safe and secure in retirement; enough to maintain a client’s current lifestyle with a buffer for the unexpected, such as medical expenses.

“That can help them make a decision around how they help the next generation, such as for a deposit for a first home. There are people that gift deposits, there are people that lend the money to kids at a favorable interest rate with an expectation that it’s returned, or sometimes it’s a debt that’s forgiven on their death.

“The priority still comes back to ensuring their retirements are safe.”

Navigating future uncertainty

Discussions around tax settings – the possibility of a capital gains tax or a wealth tax of sorts – frequently crop up with clients and even more frequently in election years. 

“The challenging thing for families is ensuring that how they structure their affairs is liquid enough or adaptable enough to meet changing tax requirements, but it’s not something we would make assumptions about.” 

“We would encourage people to get independent tax advice and establish structures that allow them to change should they need to in the future.”

Tax concerns can also arise as families become increasingly global, with family members living in different jurisdictions that have different tax regimes and inheritance laws.

The sooner, the better

De Bruin says it’s “never too early” to start the conversation about impending inheritance plans.
 
“Relying on someone else to educate our kids on money matters is a mistake, it’s something that is extremely valuable for a family member to help their children and grandchildren with.

“If you aren’t comfortable starting that conversation yourself, the best first step is to speak to a professional financial adviser who can help facilitate it.”

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