According to the Productivity Commission, inheritances and gifts have more than doubled since 2002 and could rise four-fold between now and 2050.
That’s an estimated $3.5 trillion dollars of wealth changing hands between now and 2050!
This transfer of wealth over the next 30 years could have wide reaching implications for those inheriting it, those leaving it behind, their businesses and the economy generally.
This article explores four key steps current and future generations should undertake to prepare themselves for the great transfer of wealth.
1. Discover your legacy
The first thing that you should contemplate as a business owner is the legacy you want to leave behind. Get clear on what you want for your business, for your family and for yourself. How do you want to be remembered? What is important to you? What do you want for your children? What do you want for your business and all of those that it supports? How do you want your estate to be split?
These are all fundamental questions to ask yourself when trying to discover your legacy. Knowing the answers to these can often be difficult and can take time, but the sooner you start thinking about it the clearer it will become and the greater the likelihood that you will achieve it. If you want a good legacy, then don’t leave it to chance!
2. Set up a structure that can stand the test of time
It’s all well and good to know what you want your legacy to be, but how you structure your affairs can make or break it. If it is not structured correctly, it can lead to family conflict, result in excessive taxes being paid and could even threaten the long-term viability of your business and your family wealth.
All too often do we see families stop talking to each other as a result of a poorly structured succession plan. Therefore, get your structure right. Design it so that it protects your family assets, is clear on how your estate will be managed and is efficient from a tax perspective.
3. Communicate and document everything
Communication should be at the heart of your planning process. Whatever the vision that you have for your business and your family, it’s important to know and understand if this vision is shared with your successors and the family.
Often times conflict arises from a lack of communication and misunderstanding. Talk to your successors often and make a point of including them in the process. Does your family know what your wishes are? Does your family know what the plan is for your succession? Do you speak with your successors regularly about this these matters?
It is often helpful to get an advisor involved in with these discussions. We often find that while both generations are thinking about this issue, they are hesitant to discuss it as they do not know how to bring it up in a constructive manner. Possibly worried that it could cause conflict or that it is a taboo topic.
That is where an advisor can come in, they can guide you through the process and ensure that everything is put on the table and discussed. They will also help you to document your succession plan, including your Wills, shareholders agreements etc, and will become someone the next generation can turn to for guidance and support.
4. Prepare the next generation to succeed
Wealth can do strange things to people. It’s important that your successors are prepared to handle the responsibility that comes with significant wealth.
To assess this, you should first conduct an inventory of your successors preparedness to handle the transition. Consider how money and responsibility may affect them and their lives. If there is a family business, consider if there are any knowledge gaps in respect to the business.
It may be necessary you your successors to undergo further training, study and may even need to work in another business for a while to bridge some of their knowledge gaps.
It is also important to start to get them involved in the decision-making process that occur within your business so they can see how you make decisions and manage.
There are many moving parts here, some of which you will not know about or have the expertise in. That’s why it’s important to get advice along the way.
Every family is different, and every transition is unique. However, if you can go through the above steps then you can drastically increase the chance of a successful transition. With that in mind, the best thing that can do right now is to actually get started. It takes time, and the more time you invest in it, the better the outcomes.
This article first appeared in the July/August issue of INCLEAN magazine
Andrew Ash is Director – Accounting and Tax at HLB Mann Judd www.hlb.com.au