According to the latest figures from Statistics Canada, almost 22% of the working-age population is now approaching retirement. This isn’t too surprising, since the youngest members of the baby boom generation will turn 65 in 2031, when the oldest baby boomers will be reaching age 85. At that point, almost everyone in this huge demographic cohort will be retired.
In many cases, they will also find themselves in possession of significant wealth that will eventually be at least partially bequeathed to the next generation.
Experts have had this intergenerational wealth transfer on their radar for some years now. In the United States, this phenomenon is expected to peak in the middle of the next decade, when the youngest baby boomers will already be nearing age 75.
Statistics Canada figures confirm that this generation is definitely holding the lion’s share of assets in our society.
Put the odds in your favour
If you are part of this generation, you and your contemporaries share a significant challenge: how are you going to ensure a smooth transfer of this wealth to the next generation? Be aware that according to some studies, a mere 30% of intergenerational transfers are successful – a successful transfer being one where the family retains control of the assets and family harmony is preserved. Furthermore, almost all unsuccessful transfers seem to involve a failure to prepare the heirs, a lack of communication and the absence of a shared vision.
When it’s time to plan your own wealth transfer, you might want to consider the following three guidelines.
Rule No. 1: Communicate
Experts generally recommend opening a dialogue with all family members to let them know the state of your finances and your intentions. Unfortunately, this is often more easily said than done: many families – and even many couples – aren’t comfortable talking openly about their financial assets. The primary benefit of this kind of dialogue could be to clear up any ambiguities and to see if there really is a “family feeling,” a shared vision and values that will facilitate the transfer of wealth.
Obviously, this is not without risk. For example, disclosing the assets to be inherited could have a demotivating effect on your children when it comes to their own individual challenges. It could also create expectations about how they might use these assets if you were to make a partial transfer during your lifetime. In fact, about two out of three Canadians would consider transferring part of their legacy during their lifetime.
Rule No. 2: Educate
The level of financial knowledge varies greatly from person to person. Within a couple, for instance, it often happens that one person ends up making most of the financial and investment decisions. So it might be necessary to help everyone involved, starting with the spouse, to develop an adequate level of familiarity with the issues, in accordance with their age and ability to understand, of course.
At this point, you might find yourself faced with differences in values. Indeed, recent studies tend to show that millennials, for example, have a view of the financial world and a sense of investment risk that is very different from that of earlier generations.
Outside specialists, including your advisor, may be able to clarify some issues for the benefit of all concerned and direct you to the right educational resources.
Rule No. 3: Plan
Finally, once all the variables are looked after, there’s the matter of planning the transfer. This transfer of wealth can take place during your lifetime, after your death (through your will), or both. It’s a good idea to carefully weigh the tax implications of all your decisions, and it may be that certain financial tools, such as life insurance, could be considered to offset the amount of tax deducted at death.
Planning is all the more important if you own a business. Statistics show that almost half of family-business bankruptcies are precipitated by the death of the founder. And over the longer term, it seems that a majority of family businesses are not likely to survive beyond the second generation of heirs.
The intergenerational wealth transfer now under way could have a noticeable impact on our economy and the markets. But if you are involved in it, you might initially feel the impact on your own wealth and that of your loved ones. Don’t hesitate to seek advice.
The following sources were used to prepare this article:
Investment Executive, “Record number of workers eyeing retirement: StatsCan”; “More Canadians are looking to pass on inheritance early, study finds.”
MarketWatch, “The largest wealth transfer in history has already begun.”
RBC, “Wealth transfer and the next generation.”
Rotman, “Preparing both 'the family' and 'the money' for the transition of wealth to the next generation.”
Statistics Canada, “Inter-generational comparisons of household economic well-being.”
Wealth Management, “Ten Ways to Talk About Family Wealth.”