We are about to see the greatest generational wealth transfer in history. In the upcoming years, trillions of dollars and assets will pass from baby boomers to later generations.
To put it in perspective and give a figure, according to researcher Mike Boyd, about $68 trillion US dollars (about $87 trillion AUD) will be passed on in the US alone. Much more if we include Australia, Europe, Asia and the rest of the world.
Studies have been performed on some members of the world’s most interesting and wealthy families – to try to understand how they pass knowledge, resources, values and wealth to the next generation. These studies show the importance of having a deliberate long-term plan and vision for this transfer to the next generation, which includes the creation of a family constitution, a family charter and other documents that educate the younger generations about how the business started, including the sacrifices made by the founding family members and the values upon which the business is based. Without such a plan explicitly setting out the history, values, family mission and how to deal with conflicts, there is little chance of the family-owned business lasting multiple generations.
In this respect, according to the Family Business Alliance: only around 30% of family-owned businesses make the transition to the second generation; 12% are still viable into the third generation; and only 3% of all family-owned businesses are still operating at the fourth generation and later. This means that 97% of family-owned businesses don’t make it to the fourth generation and beyond.
Many who inherit as part of this record transfer will have minimal knowledge of running a business, including the importance of having appropriate corporate governance and access to the right advisors.
In an environment with record low interest rates and high asset prices across the world, there will be pressure on future returns – so preserving and growing the wealth and the family business will be extremely difficult. Even if that is navigated successfully with the right family mindset focused on stewarding the family wealth on behalf of the next generation, tax authorities across the world will continue to compete for revenue to repay record deficits and generous welfare programs. In doing so, tax authorities will continue to target large wealthy families. Indeed, in Australia the ATO has commenced its program of reviewing the top 5,000 taxpayers. The last thing the inheriting generations need is the tax authorities eroding significant value and resources.
With each generation, the family gets larger and there are greater numbers of stakeholders with often differing priorities and interests. While proven ways exist to maximise the likelihood of the family business surviving through generations, inevitably some members of a family may have no interest in the business and may want to cash out. It is imperative that these and other issues are considered well in advance so that appropriate mechanisms are in place to facilitate such contingencies, so that they can occur in a tax efficient way without ruining family relationships.
In addition to costly family disputes, if not considered in advance, families run the risk of inadvertently triggering all types of unexpected and unnecessary income and state taxes. With an increasingly aggressive ATO, if not properly planned and advised, families may even find that they need to dispose of strategic family assets just to fund unexpected tax liabilities, all of which can significantly erode the value of the family enterprise.
This complexity is compounded when assets are held across multiple jurisdictions, with family members living all around the world.
If you want certainty over your planned generational wealth transfer in a way that also preserves and maximises the value of what you intend to pass on, we suggest that you start making detailed plans now.
For further information regarding the above, please contact the author or any member of our Tax team.
This information and contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.