Lesson type: Think like an investor

The looming problem with family wealth transfer

This article from Dave is included in our Reinvention is the new Retirement eBook. Download the full eBook for free here.

Think that an inheritance will solve all your financial worries? Don't assume it, and make sure it's structured correctly, writes Dave Rae.

The transfer of wealth in Australia looms as a significant opportunity with around $3.5 trillion expected to be passed down over the next 20 years[1]. While this equates to an average inheritance of about $320,000, around 25 per cent of inheriting Aussies will receive more than $600,000 each[2].

Receiving a sudden large sum of money, whether an inheritance, a lottery win, or an insurance pay-out, can cause a range of emotions and reactions. When a family member passes away, you are dealing with grief but add in estate issues and it can lead to anxiety, resentment, or a fear of losing money.

A study in the US by The Williams Group[3] revealed that 70 per cent of wealthy families will lose their money by the second generation. If that’s not alarming enough, 90 per cent will be lost by the third generation. Coincidently, studies also show that if you win the lottery, there is a 70 per cent chance that you will blow it all within five years[4].

Hard to imagine, isn’t it? But a sudden windfall can lead to feeling like you never need to worry about money again. Ironically, it’s this lack of worry that can lead to splurging on cars, holidays and gifts before thinking about the future. Evidently, the majority of people are not equipped to deal with this situation.

Most of us cannot imagine our families could be ripped apart by money. But money can do strange things to people. We’ve read about high profile families who have sued each other or no longer talk due to money issues. You don’t think it can happen to you? The number of estates that end up in court is on the rise. And what of the young lives ruined by too much money too soon? No value or appreciation for hard work and making your own way.

How do we ensure we make the most of this once-in-a-lifetime opportunity for the next generation? Not just to protect your wealth, but to protect your children from being ruined by it?

I believe the most important aspect of intergenerational wealth planning is understanding the wealth behaviours of beneficiaries. Sarah Fallow of Data Points[5] has identified a series of distinct and consistent factors that predict the likelihood that an individual will build and maintain wealth. Her research is based on 40 years of behavioural study. It also incorporates the work of her father Thomas Stanley and his ground-breaking book The Millionaire Next Door.

The behavioural factors that have been identified as leading to wealth building are:

  • Frugality – willingness and ability to spend below your means
  • Responsibility – extent to which you take control of your finances
  • Confidence – belief that you can improve your situation
  • Planning and monitoring – setting goals and monitoring your progress to achieve them
  • Focus – discipline to avoid distractions and stay on track to reach your goals
  • Social indifference – spending to display social status versus social indifference to the spending of others

Together these factors can be assessed to reveal who is more (and less) likely to build and maintain wealth. Understanding the wealth building potential of each beneficiary could be key to understanding who is likely to spend or save their inheritance. This could be the difference between Generation X setting themselves up for the future, or spending and eroding it in just two years[6].

What are the actions a family can take to improve the outcome from both a financial and personal point of view? The following should be considered:

Estate planning – the simple option for a Will is that assets are evenly split between your beneficiaries. However, this won’t help if behavioural issues have been identified. Should you consider a testamentary trust (a trust created via a Will)? This is useful from a tax point of view, but also has the ability to provide asset protection which can be advantageous if a beneficiary goes through a relationship breakdown, has a disability, owns a business or has drug issues. Consideration of whether a beneficiary receiving their capital immediately should extend to whether they are financially responsible enough to handle it.

An extension of the estate planning process should also consider:

Money behaviour assessment – for each beneficiary as outlined above to understand their wealth potential. If a beneficiary has a low wealth potential then steps can be taken to protect the estate and the damaging effects a windfall could have on the beneficiary.

Financial education – at the estate level in order to gain an understanding of the issues. At the beneficiary level education can be tailored depending on individual wealth building potential of each family member.

Communication – hold a family meeting to discuss the relevant issues, explain the estate plan and agree on an education plan. Consider advice arrangements to be put in place at the time of wealth transfer and post transfer to ensure it endures.

Early inheritance – increasingly older Australians are gifting a portion of their estate sometime before their death. Whether it is to assist their children into the property market or pay for their grandchildren’s private school education. Again, it’s important to consider the financial responsibility.

Family charitable trust/foundation – no longer the sole domain of high net worth families. A charitable trust can bring together family members for the common purpose of giving back.


Like Dave's lesson? View more from him, with lessons in dealing with investment headlines, budgeting, borrowing, handling investment losses, getting retirement ready, and motivating yourself to invest.

[1] Wealth Transfer Report Aug 2017 – No More Practice Education & McCrindle

[2] Intergenerational Wealth Transfer: The Opportunity of Gen X & Y in Australia – Griffith University & No More Practice Education

[3] The Williams Group


[4] Financial Psychology and Life Changing Events - Financial Windfall – National Endowment for Financial Education

[5] Data Point


[6] Wealth Transfer Report Aug 2017 – No More Practice Education & McCrindle

Related lessons

Lesson type: Understanding investment philosophy

How taking the path less trodden can help you beat the market

Graeme Forster

Graeme Forster of Orbis Investments discusses how he thinks outside the box when looking for stocks to invest in, and how unpopular companies could in...

View Lesson >

Lesson type: Understanding diversification

Tesla vs. Honda: who would you back?

Graeme Forster

Tesla has been dominating the news headlines as of late, but this hasn’t dampened the public perception of the company’s value. Indeed, investors ...

View Lesson >

Lesson type: Think like an investor

Maybe it’s time to let go?

Deborah Kent

Many people can no longer afford property in Australia but as Deborah Kent writes, it may be time to start thinking about becoming an investor instead...

View Lesson >

Lesson type: Think like an investor

Balancing risk and opportunity when investing in the next big thing

Joel Fleming

Joel Fleming of UBS Asset Management takes Blair on a microcap masterclass and teaches him how to spot the next big thing in investing and the importa...

View Lesson >


Get the latest lessons

Enter your email address to subscribe to our Investment Series newsletter and we’ll let you know when new content goes live.

Please enter a valid email address.

Almost there!

Thank you for registering your interest in Lessons. . We’ll email you the latest content as it goes live. To complete the subscription process, click on the subscribe button below. An email will then be sent to you outlining steps to finalise your subscription.

We’re committed to helping you get the investment knowledge you want, so let us know what you’d love to see more of:

  • TV Show
  • Wealth Stories
  • Experts
  • All of the above

I have read and agree to the terms, privacy policy and financial services guide.