DARREN SNYDER

Over the next two decades, an estimated $3.5 trillion will be transferred between generations in Australia, according to McCrindle research. The figure, first published in 2016, has led many commentators to question how up-and-coming generations will handle this massive wealth opportunity.

The pool of money will unquestionably be a welcome addition, helping people experience greater financial independence, whether it is now or in their retirement. What must also be considered though, is the kind of lifestyle we want to pass on.

In our feature "Baby steps for new parents" (page 44) we point out that, at a minimum, it takes $300,000 for two parents to raise two children up to the age of 17. Now in our cover story we look at what financial habits we should create for our kids, and warn that mum and dad will need some cash in reserve when they become the bank of choice for their children – the fifth largest lender in the country and growing, according to comparison website Mozo.

When you listen to the experts and governments you can imagine our super system growing to more than $9 trillion, or triple the size it is today, in the next 20 years. Research also tells us that Australia will have more than two million millionaires by 2024. On the surface it paints a rosy picture of our future wealth. However, if Covid-19 has taught us anything, it’s that nothing is certain. It’s an uncertainty that understandably has us worried about our futures and whether we’ll be financially secure. Even before the pandemic hit our shores, countless studies tell us that money worries were common.

There’s the Perpetual research from December 2019, which says more than two-thirds of Aussies (76%) don’t have a will and 53% of parents have not discussed their will and legacy with their children. Yet about 60% of parents in the same survey hoped their children would use their inheritance wisely.

It also estimates that 70% of families will lose their wealth by the second generation and 90% will lose it by the third. It’s no wonder that we’re worried about our financial futures.

Scrolling through the hundreds of money questions we receive every month confirms to us that these fears are genuine. One common theme to these questions is how and where to distribute wealth for future generations. Of course, the question is never expressed in those exact words. It can be about where to invest your inheritance or how to best save for a child’s future.

Here we give comprehensive responses to some of these wealth distribution questions.

Sharing your wealth with your children or grandchildren is one way of leaving a great legacy. But it can also be squandered. Worse still, it can tear apart families when some members feel they’ve been hard done by. To distribute your wealth in a responsible way requires more than simply transferring a lump sum, although this is still possible. It helps to understand the benefits and risks associated with different structures, what you want your financial legacy to be and when you want the transfer of wealth to begin.

While many wealth transfer decisions depend on your personal values, understanding and reconciling them with the different strategies available will help you make a more informed decision – one that can help rather than destroy a family.

Set a good example

Much of parenting is about leading by example, and that includes your financial habits.

“The best way to raise great kids is to give them financially secure parents,” says Tristan Scifo, financial adviser at Purpose Advisory. “The single biggest gift you can give them is to have your own finances in order.”

Children should understand from the outset that money is a finite resource, not something that’s housed on rectangular plastic and of limitless supply.

Scifo warns that many families fail to totally get on top of their budget. They then get stress-tested through various trials and tribulations and their plans fall apart. “Start saving for your kids from the day they’re born, or even earlier,” he says. “Beyond that, it’s worth setting aside something, even down to a dollar a day.”

This flows onto what you might consider the most important aspect of financial support – mentorship. Contributing to your children’s wealth isn’t just a direct, tangible transfer of wealth itself. Rather, it should start early, and it should start with education.

Research from the Organisation for Economic Co-operation and Development (OECD) shows one in four students are unable to make even simple decisions when it comes to everyday spending.

It follows that it is incumbent on parents to do what they can to educate children on sound financial habits and, if possible, investment concepts learned through shared experience.

“You want to generate accountability and knowledge of the financial world we live in,” says Scifo.

It helps if the education is an interactive exercise, where you guide without providing a crutch by taking away the child’s decision making. This could involve providing your children with an internal household currency, or credit, before providing real money for them to spend in the real world.

Scifo is quick to point out that although internal currency replicates the real world, there is much less scope for children to exploit it.

The currency could go towards simple things such as screen time. Your children will quickly understand saving and spending, especially the important concept of delayed gratification, made famous by Stanford’s 1972 marshmallow experiment, which found that those children who were able to wait a few minutes before eating a marshmallow in return for a reward were found to be healthier and more successful 40-plus years down the track.

Scifo recommends adopting strategies that suit the child’s personality. If they’re hands-on, set up something tactile like a market stall. If they’re tech-oriented, perhaps robo investing is the way to go.

“Some [robo advisers] are based on exchange traded funds, like Six Park, and others are direct share portfolios, such as Spaceship. They’re sound investment strategies and are tech-oriented, so they’re oriented to youth. But the emphasis is on the financial awareness they instil,” he says.

The ASX sharemarket game offers another ready to go way to introduce your children to the concept of equities, including their risk.

Financial habits are exactly that – patterns of behaviour that become ingrained through reiteration, replication and repetition. But the focus should not just be on your children; improving their financial literacy also requires educating them on your own financial

journey – the victories but also the mistakes. “That can be scary for some parents, who may not have taken the time themselves to look in the mirror and reflect on their own financial decisions,” says Scifo.

He says this aspect can be helped along by a professional, who can provide you with a frank and unbiased assessment, which you can then relay to your child. “That way, you’re sharing from a place of strength and expertise,” he says.

Bank of mum and dad

Business is booming for the bank of mum and dad. Increasingly, adult children are calling on their parents to fund everything from phone bills and groceries to rent, cars and education.

A survey by the Domain property portal reveals that more than half of Australian parents subsidise the lifestyles of their adult children, with almost 40% letting them live rent-free.

Research by the comparison site Mozo found that the bank of mum and dad is the fifth biggest home lender in the country, lending an average of $73,522 to help their children get into their first home.

It’s not a bad thing in itself to provide for your children – that is, after all, one of the core tenets of parenthood. “Parents aspire to be the bank of mum and dad and provide financial support to their children,” says Josh Funder, chief executive at home equity specialist Household Capital. “But intergenerational wealth transfer needs to be responsible. Boomers must make sure their own needs are met before trying to assist their loved ones.”

Aside from the fact that parents’ pockets are not bottomless, providing too much support can become a crutch, especially during early adulthood. “If it’s become a crutch then the mistake has already been made,” says Scifo.

The bank of mum and dad can be understood in terms of both the level and nature of the support provided. Complacency and other negative financial habits can stem from receiving too much, receiving it too easily, or a combination of both.

“Lending to kids is great, but you should have an agreement in writing,” says Scifo.

Heidi Schwegler, a financial planner at AHS Financial, says if you are giving money, make it clear that it’s a gift without the expectation that it will be paid back.

Early inheritance

The urge to provide compels some parents to consider passing on wealth to children earlier in life. But providing an early inheritance is uncommon.

Research by the Grattan Institute found that the most common age to receive an inheritance is 55-59, while more than 80% is inherited by those over

50. And about 75% of inherited estates are less than $1 million (see graph).

“As life expectancy continues to increase, we would expect today’s young people to inherit even later in life. This means that inheritances are increasingly likely to supplement people’s retirement savings rather than help young people into the housing market,” says the institute.

The research also found that people under 45 are more likely to report receiving a gift from parents than an inheritance in a given year. But gifts tend to be small – less than $1000 a year on average. For the 16 years from 2002 to 2017, less than 3% of people under 50 reported receiving gifts of $50,000 or more.

On the face of it, it seems logical to gift an inheritance at a time when children are in greater need of it. But is it the right or wise thing to do?

“On the one hand, parents need to set themselves up financially, but on the other hand they see their kids struggling and in need of support,” says Schwegler.

She believes that as long as you say “this is a gift”, bringing forward the inheritance is a good thing because everyone benefits – the parents get joy from seeing their kids get a leg-up and the children receive wealth when they need it more.

However, gifting inheritance can’t come at the expense of your own ability to pay for your lifestyle.

“We have a lot of debt,” says Lisa Barber, a financial planner from Hillross Aspire. “Once future care arrangements and provisions are organised, anything above that – it can be beneficial to distribute before death.” However, you don’t know when your time is coming, so there’s a risk you distribute too much too early, says Barber.

Schwegler says first and foremost, parents need to make sure they’re financially secure. People are living longer, and while the costs may decrease as you get older, retirement can be expensive.

“The problem I often see arise is the cost of aged care, which can be horrendous,” she says. “While everyone thinks that they’re fit and healthy all the time, you need to plan for that situation.”

Beware elder abuse

Of course, early inheritance should be top down, not bottom up. Elder abuse, also known as inheritance impatience, is a pervasive and often unreported problem. Abusive children can feel both motivated and justified in taking advantage of their parents due to the expectation that they will inherit their wealth anyway.

The Financial Services Council says common forms of elder abuse relating to inheritance include:

• Failure by adult children to sell assets or release funds needed by an elderly parent for the purposes of preserving inheritance.

• Adult children gaining control over all inheritable property and exhausting estate resources to the disadvantage of elderly parents or other beneficiaries.

• Adult children benefiting from carer payments without providing adequate care-giving services to the elderly parent.

“A will is not bulletproof. The courts are often in a position of authority to decide on the basis of need and moral claim,” says Greg Bird, head of strategy and distribution, life and super at Australian Unity.

“This, along with the increasing number of estates that involve blended families, mean careful planning to ensure your client’s estate is distributed according to his/her wishes is more important than ever.

“Also to be considered is perhaps the biggest ticking bomb – the increasing incidence of dementia in elderly Australians, which can create a raft of problems where capacity and undue influence may be concerned.”

Methods to protect against such abuses include assigning multiple powers of attorney and advanced care directives, estate planning, including wills; structuring or preparing “granny flat” agreements; and other similar intra-family agreements that are documented.