The Great Wealth Transfer

Australia is on the brink of a monumental economic shift, projected to be the largest wealth transfer in our history. By the year 2050, an estimated $3.5 trillion in assets is expected to change hands in Australia, reshaping the financial landscape for generations to come.  This seismic shift, as detailed by the Productivity Commission, posits that an average of $224 billion will be passed down annually in inheritances by 2050. 

Australia is not alone - Over $100 trillion (US$68 trillion) in assets globally are expected to be passed on, expected to be the largest intergenerational wealth transfer in history. These previously unseen levels of wealth will shift from the estates of “baby boomers” – people born between 1946 and 1964 – to their heirs. 

Intergenerational wealth, simply put, refers to assets passed from one generation to the next. The concept is not new, but the scale of the impending wealth transfer in Australia is unprecedented. It promises to have profound implications for economic equity, family dynamics, and societal structures. These assets can be property, superannuation funds, businesses or share portfolios. They can also be personal possessions like jewelry and art, as well as intellectual property and even digital assets.

Out of the assets expected to change hands in the coming decades real estate, superannuation and family-owned businesses are likely to be the biggest. 

Real estate remains a cornerstone of Australian wealth. The rising property values over the decades have bolstered the net worth of many Australian families, particularly baby boomers, making it a significant component of the inheritance boom. As we highlighted in a recent spotlight article  Why Can't I Afford to Buy a House? (elladex.com) home ownership seems to be getting further out of reach for many Australians so the potential inheritance of housing may have a significant impact here. 

Our Superannuation system stands out as one of the world's most robust retirement funding schemes. Since 1992 when employer contributions were mandated, superannuation assets have grown substantially. As of the end of December 2023, the total superannuation assets held by Australians amounted to $3.7 trillion. These funds not only ensure a secure retirement but also represent a significant component of the wealth that families inherit.

Family-owned businesses, ranging from small enterprises to large corporations, form another vital asset class. The transfer of these entities is often complex, involving legal and financial considerations that can impact the business’s continuity and health. The process of transferring ownership and management can deeply impact both family harmony and financial stability. If there is not a suitable successor, usually one of the children, to take over the business, the tough but sometimes necessary decision to sell or close the business may prevent future conflicts and protect family wealth. 

Regardless of the asset, potential tax implications are a common concern for beneficiaries. Notably, Australia abolished inheritance and estate taxes in 1979 but before you get too excited, there are still tax considerations. Currently, tax obligations mainly arise when disposing of an inherited asset, which can trigger a capital gains tax event, or from income earned through inherited assets. In the context of superannuation, tax treatment is a little different. Superannuation has a taxable and a tax-free component and this allocation differs for everyone depending on how the money entered the superannuation system. The taxable component of a superannuation balance is taxed when it is passed on to a non-dependent, such as an adult child. These various tax treatments highlight the importance of understanding tax liabilities that may impact the value of inherited assets and getting professional advice for an effective estate plan in place. 

Another concern, more so for those bequeathing wealth, can be around relinquishing control over the future management of one's wealth. The adage, "If you can't manage ten dollars, you can't manage a million dollars," rings especially true when considering the challenges faced by those who come into sudden wealth. Inheriting wealth, much like winning the lottery, can present complex financial challenges that require careful planning and discipline to ensure long-term financial stability and growth. There are numerous instances where lottery winners have fallen into financial ruin due to poor management of their newfound wealth. This underscores a critical lesson for people inheriting significant assets: without the necessary financial literacy and fundamental money management, even the largest fortunes can be squandered. 

And then we have the economic implications and concerns.  The scale of this impending wealth transfer is not just a matter of personal finance but a significant socio-economic event that will shape Australia's future.  Economically, it has the potential to widen the wealth gap between those who inherit substantial assets and those who do not, exacerbating economic inequalities. 

If you need to have important conversations with loved ones to discuss estate plans there are steps you can take to encourage a conversation in a way that is respectful and graceful. Check out our previous article here:How to have empowering wealth conversations across generations (elladex.com)