Passing on wealth to the next generation: how to approach it?
Many families preserve their assets not only for the current generation, but also for the next one. But how should the assets be transferred in a sensible way? Should the children learn how to handle wealth as early as possible or only take responsibility for it once they are a bit older? When is the right time? In what steps and how to approach a transfer of wealth?
There are different ways to approach the issue - there is no single best practice. This is an attempt to list and describe the most common approaches used by our Wealth Office clients.
Giving children a basis to kick-start their life independently
Children often receive an initial allocation of assets, which has the character of a start-up financing to kick-start their own, independent lives. The idea is to transfer a pre-defined amount to the children at a certain point in time - often once they turn 18 or after graduation. This amount is then usually at their free disposal. In some rarer cases the payout is tied to specific purposes. The focus here is on financial independence and personal responsibility in matters of wealth.
Suggestions
- Provide a generous, yet not exaggerated amount
- Avoid tying specific purposes to the payout
Financing a property or an entrepreneurial idea
In many cases, the first significant financial commitment for young families is the purchase of a home or the financing of an entrepreneurial idea. Supporting such an endeavor financially is a popular approach. Here, too, the amount can be defined in advance or deliberately kept open and made dependent on the timing, type and size of the property. In this case, the goal is primarily to support the start of a family. The transfer of responsibility in property matters is less in the foreground. The timing depends primarily on the family or life planning of the children and can therefore also vary from child to child.
Suggestions
- Communicate the intention early on so the children know that assets could be made available for such purposes, in order to avoid any guilty conscience
- Choosing well the equal treatment of siblings and the form (see also below) of the transfer of assets
Connecting generations through the family's wealth
The establishment of family assets in the form of a company or, less frequently, in the form of trusts or foundations, in which the children or several generations participate, is becoming increasingly common. In this case, the company holds the assets, often also real estate, and is responsible for managing them. Here, the process of involvement and assumption of responsibility can be shaped via the ownership and organs (board of directors) and thus take place gradually. Depending on preference, participation and co-responsibility in the management of the company and thus of the assets are more or less central.
Suggestions:
- Simpler structures are preferable
- Set clear rules and governance
Transfer of wealth: Loans? Advance inheritance? Gifting?
Parents may also be convinced that the family assets should be available to the children as early as possible. The available funds for themselves are thereby often defined by the maintenance of a certain standard of living. In this case, the assets are divided up at a certain point in time and made available to the children as a gift or advance inheritance. Common models of division in the case of inheritance are applied here. In this way, the next generation often consciously assumes responsibility for the assets at an earlier point in time - whereas the parents withdraw from this process.
Suggestions:
- A step-by-step approach facilitates the handling
- Pay close attention to the form of the asset transfer. A loan is usually easier to handle than an advance inheritance or gifting
- Do not ignore the tax consequences
Which approach is suitable for which family depends strongly on individual preferences and the family culture. It makes sense to actively shape this process and to discuss and determine it as early as possible. Who should be involved in this process also varies from case to case. On the advisory side, we have made very good experiences with an orderly inclusion of the next generation, sometimes even the generation after that. Professional guidance and appropriate role allocation or support and relief of parents from process tasks can be very helpful, but is not a must.
It is worthwhile to deal with the question - if necessary with the involvement of the children - and thus to make a conscious decision. A look at possible solutions reveals various recommended approaches.
Our Experts are happy to answer any questions on the topic.