Keeping it in the Family

6 mins reading

What does it take to ensure the transfer of family wealth goes beyond three generations? Justin Greiner explains.


CONSIDER THE FACT that many of us are about to be part of the most significant intergenerational transfer of wealth in Australian history. In fact, the Productivity Commission anticipates an almost fourfold increase in the total value of inheritances over the next 30 years.

It’s a salient reminder of how lucky we are to live where we live, not only because of Australia’s sustained economic growth over recent decades, but also because we’re able to reap the benefits of being in a country that gives us considerable freedom to forge our own path, making business and investment decisions that align with our values.

Yet this good fortune does come at a price, particularly for those who have a significant inheritance. Becoming a custodian of the family wealth is a responsibility as much as it is a windfall, and may entail considerable pressure and stress. The task is not only to provide for oneself and one’s family, but to go beyond the day-to-day and do something that has purpose and meaning.

This responsibility shouldn’t be a solo one; it’s up to all generations to decide how the family’s wealth should be put to work.

Talk early, talk often

Research shows that the vast majority of family wealth is lost by the third generation. The first generation makes the money (going from rags to riches), the second generation tends to keep the money and the third generation squanders or loses it (returning from riches to rags).

Ensuring this doesn’t happen to your family requires consultation and input from all sides. It can’t be a matter of the first generation telling the third what to do.

Conversely, the third generation can’t afford to ignore the history and wisdom of those who created the wealth.

It’s about two-way communication that involves respect, transparency and a “talk early, talk often” approach. Understanding the direction your family is heading in – and what your wealth is for – can help you to move forward and put in place strategies to preserve and grow it while it works towards something you all believe in.

Finding common ground

By the time the third generation is involved, discussions may include 20 or more people. Granted, it may be more difficult to find common ground than it was when there were just two or three family members, all listening and being heard. However, the sheer size of the undertaking makes communication that much more important.

And you may be surprised. We find that while each aunt, uncle, cousin and great­ grandchild has their own perspective, there is often a common thread in what they view as important.

How you go about reaching a consensus differs for each family. If your affairs are relatively straightforward, it may be as informal as sharing your hopes and plans- past and future – around the dining room table. If you’re dealing with multiple assets and multiple generations, you might wish to tum to structured third-party mediation or even a family contract.

The benefits of a business

A larger family does pose more challenges. At the end of the day, you need to make sure the real value of your wealth keeps pace with the growth of your family, bearing in mind influences like inflation and taxation. This requires taking on greater risk, whether that’s in your investment portfolio or the family-owned business.

After all, we’re not necessarily talking about liquid assets. Instead of receiving a pool of money, your inheritance may be an operating business. That will require much more input, including choosing the right family members to oversee or manage the business, in accordance with the family’s long-term vision. In Europe, many multigenerational businesses have continued to thrive with these principles at their core.

On the upside, an active business can help with the inevitable growing pains that come with each generation. A family business that is successful, and that you can influence strategically, can be a good way to complement a more passive investment portfolio.

Why clarity is crucial

Today, we see many families choosing to sell the business, either in a trade sale, management buyout or floating it on the stock market. This raises other questions, such as whether the family will ever get the business back. And if it is the right decision for the next generation. Whatever your family decides, it’s imperative you don’t put the business at the centre of your decision-making. Ultimately, it must serve you as one asset among many.

Again, transparency and communication are critical. If you continue to own and run the business, it’s important to avoid friction between family members. There needs to be real clarity about when you are operating as a family versus when you are operating as agents and owners of the business.

It’s also crucial that you run the business for the benefit of all shareholders, of which the family may be part or all. This means bringing a commercial lens to decisions, albeit one that is consistent with the family’s values.

Investing in a shared future

More and more of our young clients are keen to ensure the family wealth is invested in the greater good. While this generation may have different ideas about how and where to invest, what we’re consistently seeing is a strong sense of stewardship and custodianship- not so surprising given the current climate.

We should find this reassuring. It’s far less likely that the third generation will squander their wealth when they have such a strong sense of purpose. Whether they are intent on pursuing responsible investing through an Environmental, Social and Governance (ESG) framework, impact investing or a philanthropic cause, the focus and resolve of these young people mean they are much more likely to preserve and grow their capital – for the good of their family and the wider community.

The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider wtlether it is appropriate for your circumstances. NAB recommends that you seek independent legal, property, financial and taxation advice before acting on any information in this article. ¬©2022 National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686