Preparing your family for the great wealth transfer
The greatest intergenerational transfer of wealth in Canada’s history is set to take place over the next few decades, but are high-net-worth families prepared for the shift?
Canada’s high-net-worth population is getting older, with more than 40% of millionaires over 65 years old, according to research. Made up of nearly a quarter of a million households, the over-65s have been the fastest-growing segment of the high-net-worth market, increasing by more than 20% in the past five years. This wealthy demographic is expected to nearly double in size over the coming decade, as baby boomers—those born between 1946 and 1965—continue to reach retirement age.1
Approximately $1 trillion in personal wealth will be transferred from one generation to the next in Canada between 2016 and 2026, according to estimates, with roughly 70% of that in the form of financial assets.1
This shift represents the largest transfer of wealth in history, but questions remain whether high-net-worth families are prepared for the change. Worryingly, 32% of high-net-worth Canadians say they have fears about how their heirs will handle their inheritance, and 36% say their children don't have the financial literacy to manage a potential windfall.1
Beyond the technical aspects of estate planning, a key component of successfully transferring wealth is clear, two-way communication between parents, spouses, and their children. This can be valuable on many levels, from having heirs understand the family vision, to strengthening personal relationships between parents and children by your decision to talk honestly with them.
When to start the discussion and parties involved
Finding the right time to discuss money and succession planning can be difficult. Parents may be concerned about disclosing the full details of their wealth while their children are young in case it prevents them from finding their own path in the world. They may also worry it could provide more opportunity for ill-influenced actions.
Regardless of the age of the children, discussing wealth and what will happen in the event of a parent’s death can be uncomfortable for all concerned. It may be tempting to put off, but as a result, Canadian high-net-worth families risk finding themselves unprepared for the financial road ahead. As difficult as it may be, planning needs to happen before a wealth transfer or inheritance occurs, as this can help improve the likelihood of a successful outcome.
Discussions shouldn’t be limited to children, however. In Canada, it's estimated that by 2026, women investors will directly control approximately half of total personal wealth, as the number of women who are single, divorced, or widowed continues to grow and baby boomer women continue to outlive their spouses.2 As a result, there's a growing influence of women not merely as beneficiaries of advice and planning but, at a minimum, as an equal partner, if not a managing partner.
Taking responsibility for the family’s financials can become a difficult burden for an unsuspecting and grieving partner, and it’s perhaps unsurprising that women tend to switch financial professionals within a year of their husband’s death because they're unable to find one they can connect with.2
Before talking to children, couples should discuss the family’s finances together, to ensure they're aligned and know what to expect should a spouse unexpectedly pass away. These are never easy discussions to have, but they can be extremely helpful when it comes to preparing the family for the inevitable transition.
Professionals can help steer the conversation
When it comes to approaching such an important—but often complex—subject, many families can benefit from the guidance of third-party financial professionals who have the expertise and neutral perspective to help steer what can be an emotional conversation. Financial professionals can often be used as a conduit between adult children and their parents to help open up the financial conversation.
They can also help avoid and plan for any difficult surprises, including capital gains tax on high value assets such as the family cottage. When an individual passes, assets can be transferred to the spouse tax free, but a transfer to your children may trigger a capital gains tax that must be paid before the children (or other heirs) can enjoy the property. Many cottages have increased significantly in value over their purchase price and 50% of this increase could be taxable at death. If not planned for, your estate may be forced to sell the cottage to pay the tax instead of transferring it to the children.
When selecting a financial professional for you and your family, it's important to look for a trusted and experienced company you connect with to discuss your future and finances.
Families often find it difficult to implement a successful wealth transfer plan as there are many complexities to tackle. In a complex world, we help people make clearer, easier decisions so they can live better.
Manulife Private Wealth offers regular reviews and annual in-depth discussions, keeping you informed on how your portfolios are performing against set goals, and we communicate in an understanding way. For more information on how to grow, preserve, and transition your wealth, please contact a member of the Manulife Private Wealth team for more information.
Important disclosures
1 "Investor Economics Household Balance Sheet Report—Canada," Investor Economics, 2019. 2 "Investor Economics Insight," Investor Ecoonomics, January 2019.
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