The "great wealth transfer" refers to the passing down of wealth accumulated by the Baby Boomer generation (those born between 1946 and 1964) to their heirs—primarily their children and grandchildren. This wealth includes everything from savings, investments, retirement accounts, and real estate. According to estimates, around 72% of the nation's wealth is held by Baby Boomers, and as they age, these assets will naturally transfer to the next generation.

While many see this as a massive opportunity, there are also significant challenges to consider. One of the most prominent concerns is the tax burden that can fall on heirs, especially in the case of retirement accounts like superannuation. For instance, many Baby Boomers are unaware that when an adult child inherits superannuation in Australia, they could be hit with an additional 17% tax. This "hidden tax" can come as a shock to families who weren’t expecting such a steep tax bill after inheriting what they thought was tax-free.

To avoid such surprises, it’s important for Baby Boomers to understand the tax implications of their assets and work with financial advisers to create a plan that protects their wealth from excessive taxation.

One of the key strategies to manage this wealth transfer is through effective estate planning. The goal of estate planning is not only to ensure that assets are passed down in accordance with your wishes, but also to minimise the tax liabilities associated with inheritance.

In many cases, the wealth being transferred includes both assets inside and outside of superannuation, and each comes with its own set of tax rules. For assets held within superannuation, non-dependent adult children can face significant taxes. Estate planning can help mitigate these taxes by utilising strategies such as transferring certain amounts out of superannuation before death, or taking steps to convert taxable superannuation into tax-free assets during retirement.

Shannon Smit of Smart Private Wealth frequently works with Baby Boomers on their estate planning, emphasising the importance of considering the different types of assets when creating an inheritance strategy. She advises clients to look closely at how assets like superannuation, property, and savings will be treated upon transfer, and whether trusts or other financial tools can be used to protect these assets.

One of the most powerful tools in estate planning is the testamentary trust. Testamentary trusts are created within a will and only come into effect upon the passing of the individual. They allow the estate's assets to be placed in trust for the beneficiaries, which can help protect the inheritance from being depleted by taxes, divorce settlements, or creditors.

A testamentary trust can provide numerous benefits to the beneficiaries. For example, if you leave a lump sum inheritance to an adult child and they later go through a divorce, that money could be considered part of the marital pool and subject to division. However, if the inheritance is placed in a testamentary trust, it is protected from being included in the division of marital assets.

Another key benefit of testamentary trusts is their ability to distribute income to minors at lower tax rates. Normally, income distributed to minors from a trust is taxed at the highest marginal tax rate, but income distributed from a testamentary trust can be taxed at regular adult rates. This means that minors can receive up to $20,000 tax-free, which could be used to cover important expenses like education.

For families looking to protect their wealth across generations, a testamentary trust offers flexibility and security. At Smart Private Wealth this approach is often recommends to clients who are concerned about preserving wealth for their children and grandchildren while ensuring that the money is used responsibly.

Another growing trend among Baby Boomers is the desire to provide financial support to their families while they are still alive, rather than waiting until death to pass down their wealth. This approach not only allows Baby Boomers to witness the benefits of their generosity but also gives them more control over how the money is used.

However, there are several factors to consider before making large financial gifts to family members. One key concern is whether the gift will negatively impact the giver's own financial security in retirement. Many Baby Boomers, particularly those who are still relatively young, may live for decades after giving away large sums of money, and it’s important to ensure they don’t run out of funds later in life.

Shannon advises her clients to engage in financial modelling to see how gifts of $100,000, $200,000, or more will affect their long-term financial picture. By forecasting future expenses and income, Baby Boomers can make informed decisions about how much they can afford to give without jeopardising their own financial well-being.

Additionally, it is wise to consider the structure of any financial gifts. Rather than simply giving money outright, it may make sense to treat the gift as a loan, particularly if there is a risk of divorce or other financial complications. This approach ensures that the money remains within the family and can be returned if necessary.

Investment bonds are becoming an increasingly popular tool for Baby Boomers looking to pass down wealth in a tax-efficient manner. Unlike traditional savings accounts, which are taxed at the individual’s marginal tax rate, investment bonds offer a tax-sheltered environment where earnings grow tax-free if the bond is held for at least 10 years.

These “new age” investment bonds are very different from the low-yield government bonds of the past. Today, they are often tied to diversified investment portfolios that can be structured to match a range of risk profiles. For example, if you are saving for your grandchildren’s future, you might choose a growth-oriented portfolio that aims to maximise returns over the long term. Alternatively, if you’re nearing retirement and want a more conservative approach, you can select a portfolio with less risk.

One of the greatest advantages of investment bonds is that they can be excluded from your estate, which means they are not subject to the usual estate taxes or challenges from disgruntled heirs. Additionally, if structured properly, investment bonds can be passed down to future generations with no tax consequences, making them a valuable tool for preserving wealth across multiple generations.

Shannon has worked with clients who set up investment bonds for their grandchildren, contributing modest amounts each month with the goal of creating a sizable nest egg over 10 or 20 years. By using investment bonds, these clients can take advantage of tax benefits while ensuring that their grandchildren are set up for success when they reach adulthood.

The skyrocketing cost of housing in many parts of the world has made it increasingly difficult for young people to enter the property market. As a result, many Baby Boomers are looking for ways to help their children or grandchildren purchase their first home. While gifting a large sum of money for a down payment is one option, there are other strategies that may be more financially prudent.

For example, Shannon often recommends that parents consider lending money to their children rather than gifting it outright. This loan can be structured with a formal agreement and can protect the money in the event of a divorce or other financial difficulties. By treating the financial support as a loan, parents can ensure that the funds are repaid if necessary, keeping the wealth within the family.

Another option is for parents to act as guarantors on their children’s mortgages. In this arrangement, the parents use their own home or assets as collateral to help their children secure a loan. This can be especially useful for young people who have good income but lack the 20% deposit required to avoid costly lender’s mortgage insurance (LMI).

While being a guarantor comes with some risks, it can be a powerful tool for helping adult children get into the housing market without the need for a large cash gift. Over time, as the value of the home increases and the mortgage balance decreases, the parents can be removed as guarantors, freeing them from any further financial obligation.