Wealth Transitioning:
An organised mess!
As an adviser, the simpler solutions to transitioning wealth within family are generally beautiful, except when they are ineffective. Sometimes, things simply have to get messy. I liken it to a parent sorting a kid’s toy box; unpack it all over the floor (make a mess), fix the broken bits (or quietly discard them), then pack it efficiently back like Tetris. The steps sound simple? Not so. What if the parent has to leave the floor messy for multiple financial years? What if more than one kid wants the same toy? What if the kid no longer likes Lego when it’s time to pack it back? Patience wears thin, tempers flare, it’s like stepping on Lego with bare feet…
The key with advising clients who are managing their wealth to loved ones is to break it down into small steps. It’s a transition. It’s important to have the big picture but ineffective without the correct actions in the right order.
Here’s some things to consider:
- Most clients have more than can be spent or effectively utilised, so yes, it is likely that you can hand over some assets while you are alive.
- Should you and how much? Get the advice first, even if you’re just “thinking about it”. We’ll help you work though what you should know and what you should compromise on (tax/ cashflow/ Centrelink/ liquidity/ investments/ estate). There will be compromises.
- Quarantine some assets. Not all assets are equal in their importance in your retirement years. First work out what you need, what you might need and what you probably won’t. We’ll help you refine it.
- Work out if you are loaning an asset, handing over control or giving the asset away? Or going guarantor…? Be clear in your mind and transparent with your beneficiaries.
- It’s better to promise nothing (yet), than overpromise. Expectation breeds disappointment. But under promising and overdelivering can bring joy.
- Happiness is in the giving, but once an asset has been handed on, you no longer own it and can’t control it.
No two families are the same, but almost all have their unique issues. One upside to transitioning wealth to family while you are alive is you know the circumstances under which the transition occurs. Estate planning is for the inevitable “one day”; at which time, you won’t always know your beneficiaries’ situation (think: some still working with higher tax rates, some retired with no tax etc), whether the beneficiaries get on, or whether your estate is the reason they don’t get on. Transitioning wealth while you are alive has greater control over those parameters.
Shares may be subject to CGT, account based pensions may have avoidable tax liabilities, giving assets may lead to the deprived assets rule for Centrelink (and also the costs of Aged Care); all of which can be managed while you are alive, and may apply whether your beneficiaries all love each other or not.
I mentioned “Quarantining” assets earlier and a common outcome for account based pensions in super is to lower the “taxable component” in your super benefit. The relatively recent changes to Super rules mean that more people can do this but it does mean the mess of having multiple super/pension accounts which means that each account will have different tax obligations if you die. Naturally, if you are giving assets to family while alive, you would want to protect or quarantine the super/pension account that will have the lowest tax payable when you die. Ironically, some clients love the flexibility of their Self Managed Super Fund but SMSF’s can only have one accumulation account per member which may limit their options to minimise their taxable component if they are still working. Meaning they may have to open a separate account with another super fund. Messy!
And that’s my point: Wealth transitions can be messy. Beautifully messy, but there are pitfalls everywhere, emotions can run high and to be effective, you must take small steps. Have a chat with your Adviser if this is something for you to consider. We can also meet with you and your family, we keep notes on topics discussed and provide reassurance through the process. And cut through the jargon!
Will Chapman Dip FS(FP)
Authorised Representative (No 311745)
