Honey, I cut off the kids!

The way people are bequeathing their money is changing.

As people live longer, parents are spending the kids’ inheritance or giving it away. And this spend-happy attitude isn't just for the likes of Sting, Nigella or Gates.

Updated 19 August 2016

In 2010, billionaires Bill Gates and Warren Buffett led and issued a public invitation to the globe’s wealthiest individuals and families. Called the Giving Pledge, the pair challenged the world’s ultra-rich to set aside the majority of their wealth and assets to philanthropic causes.

Since then, more than 155 from 16 countries have taken the pledge, with Andrew “Twiggy” Forrest from the Fortescue mining company the first, and only, Australian on the list.

Some of the high-profile names on the Giving Pledge list include Facebook’s Mark Zuckerberg, media mogul Ted Turner, controversial financier Michael Milken, filmmaker George Lucas, Virgin’s Richard Branson and former New York City mayor and business magnate Michael Bloomberg. Even old money men David Rockefeller and Barron Hilton have taken the pledge.

Andrew Thomas FCPA, former general manager of philanthropy at Perpetual Limited and now executive general manager at the Endeavour Foundation, believes that the Giving Pledge has triggered a discussion about what is an appropriate amount of wealth.

“Ultra-high net worth individuals have come out and said that this wealth is far too much to pass on to the next generation", he says. "It’s opened conversations around kitchen tables and encouraged people who thought they were unable to structure some giving to get on board.”

Although the commitment is a moral obligation rather than a legally binding contract, the pledges may have already proven beneficial to society, at least in terms of dollars and cents.

The Giving USA Foundation tracks donations year-on-year. Charitable giving in the US totalled an estimated US$290.89 billion in 2010. By 2014, that figure had grown to an estimated US$335.17 billion, an increase of US$44.28 billion in four years.

In Australia in 2014, charities had a total income of AU$103 billion, of which donations and bequests comprised $6.8 billion (6.6 per cent), according to Australian Charities and Not-for-profits Commission data.

Broadly speaking, philanthropy is only one piece of the estate-planning puzzle in Australia. In some cases, the industry is dealing with modern, perhaps unconventional, attitudes and approaches to the retention of family wealth.

In 2011, researchers commissioned by insurance firm Apia surveyed a sample of 2000 Australians and found that 72 per cent of people aged over 50 would prefer to spend their money and enjoy retirement rather than leave it for their kids.

The advent of compulsory superannuation in 1992 may be one reason older Australians are comfortable about relinquishing their estate planning responsibilities, knowing their children will benefit from their own superannuation commitments. After all, superannuation balances typically run second in value to the family home.

“Even 10 years ago, many Australians were disconnected and ambivalent about the estate planning consequences of their superannuation balances,” says Chris Balalovski, former head of strategic advice at Perpetual Private Wealth and now executive director at EY.

“Now, with balances increasing and the better performance of equity markets, Australians have become much more engaged. Clients are asking questions about superannuation on two fronts: from a tax perspective and ensuring the asset is protected when it passes to the beneficiary.”

Estate planners need to be across the vagaries of the Australian legal system in order to protect a will from being contested. In particular, each state and territory has its own jurisdiction governing the administration of estates.

The concept of a notional estate, applicable in New South Wales only, has also become more significant when people hold their personal assets in trusts and superannuation funds. In short, a notional estate involves adding back to the actual estate assets or values previously gifted or distributed by the deceased. Balalovski says that in some cases “assets can be clawed back”.

Murray Wyatt FCPA is a director at Morrows, specialising in superannuation and retirement planning. He believes that the traditional Australian family’s approach to drafting a will is due for an overhaul, or at the very least a rethink.

“Many Australians still think drawing up a will is a precursor to death," he says. "They don’t want to plan ahead because they feel like they might be bringing it forward.”

“Estate planning has become a lot more sophisticated. It’s about control and making sure that intergenerational wealth transfers responsibly. Taxation and tax structures are becoming so complex that there needs to be an interface between how the will is crafted, where the control lies and how that reconciles back into the corporate structure.”

Balalovski agrees. “Gone are the days when Australians were adequately serviced by a post office or newsagent’s will. A bespoke or tailored set of documents will deal with complicated structures that exist when you’re dealing with family trusts, family companies and superannuation interests.

“The generic gift wills where you would give all your assets to your partner has been an Australian tradition for many decades, but simply gifting to another party does not take into consideration the most tax-efficient recipient of benefits.

“In some cases, a mere gift will expose the weaknesses of a vulnerable individual, maybe someone with a drug, alcohol or gambling addiction. Nominating an independent executor and trustee in these sorts of situations is important and a testamentary trust is invaluable.”

A testamentary trust comes into effect after the death of the person making the will. Under this trust, the trustee distributes capital and income between a group of beneficiaries nominated in the will on a discretionary basis. Put simply, it protects assets from vulnerability.

Societal trends offer compelling reasons to plan ahead. Increased life expectancies and active lifestyles are major factors when managing retirement income.

According to figures from the Australian Bureau of Statistics (ABS), life expectancy at birth for Australians has improved by 2.5 years for males and 1.7 years for females over the past 10 years. Based on current mortality rates, a male born in 2010-2012 can expect to live 79.9 years, while a female can expect to live 84.3 years. With many Australians already living well into their 80s, savings and assets may be consumed more readily with the prospect of long-term care costs.

In many cases, younger generations may receive the proceeds from the sale of the family home and little else. And that may have to be shared among siblings. Some older Australians are making the decision to skip a generation, passing the lot onto the grandchildren.

“I’ve just come from a meeting where a client is doing just that [skipping a generation], and it’s because of the growing affluence in society,” says Balalovski.

“The grandfather has helped his own children during his lifetime and they’re set up. Now it’s the next generation coming through, the grandchildren, who he specifically would like to provide for.”

Children are also tending to live with their parents longer, benefiting well into adulthood from free or cheap board and assistance with education. A 2013 ABS report documenting social trends in Australia discovered that, in 2011, approximately 29 per cent of young adults lived with one or both of their parents, up from 21 per cent in 1976.

Another recent estate planning trend is the rise of the SKI clubbers. With the hard slog of work and financial sacrifices behind them, SKI clubbers (short for Spending the Kids’ Inheritance) are loading up the Winnebago and criss-crossing the land in search of adventure and new experiences. Others are travelling the world, spending their superannuation balances and, in some cases, reversing their mortgages.

A reverse mortgage allows a home-owner to use the equity in the family home as security, providing an instant injection of cash to fund lifestyle needs. Payment of the loan is deferred until they die, sell or move out of the home.

Generally speaking, a 60-year-old would be able to access a loan of 15-20 per cent of the home’s value, but there is very little industry regulation, and the interest rate is slightly higher, exposed to variations and compounded, with interest racking up on the principal and unpaid interest. Many in the estate planning sector believe that this type of mortgage is unnecessarily complex, lacks protection and is best avoided.

“Reverse mortgages are a solution in inverted commas only,” warns Balalovski.

“I spoke to a client just last week who was contemplating a reverse mortgage in order to assist the children, but I have all sorts of concerns about reverse mortgages and their impact on wealth. As for SKI clubbers, a family member’s death will not be the end of the matter. Simply letting the kids fight it out on D-Day is not a sensible approach to estate planning.”

The global nature of today’s working world is yet another consideration when planning an estate. Wyatt knows this situation first-hand, with one of his sons living in Singapore and another residing in Shanghai.

“Today, as soon as they finish uni, kids are citizens of the world, working for corporations in all sorts of destinations overseas," Wyatt points out. "They marry people of different nationalities and they may hold assets in various countries. The estate planner has to work across boundaries and be knowledgeable across different jurisdictions.”

Touching on philanthropy, Thomas says that high net worth families are using charitable giving as an education tool and an introduction to the family business.

“People with philanthropic structures may invite their children into the philanthropic structure to open a discussion on how the money is coming out of the estate,” Thomas says.

“It’s not just funding the next generation down, it’s also handing over control of entities, giving them an opportunity to run the family business, whether it’s a company or in a trust,” Balalovski adds.

“It’s giving the next generation directorship powers, trustee powers, appointer powers, so they are blooded in these family entities, giving them business exposure and acumen.”

As structures become more complex, Wyatt says that his clients are advised to update and review their plans on an annual basis.

“One thing I know for certain, you can never rule from the grave. But you need to protect your family wealth from the predators and the creditors.”

The SKI Club (Spending the Kids' Inheritance)

Sting

The former Police front man made headlines when he revealed that there would be no fields of gold (his personal fortune is estimated at £180 million) for his six children.

“I told them there won’t be much money left because we are spending it ... They have the work ethic that makes them want to succeed on their own merit.”

Gene Simmons

A self-made man, Simmons’ band KISS is one of the best-selling American bands of all time, putting US$300 million into his personal stash.

“They’re gonna be taken care of, but they will never be rich off my money,” he said of his two sons.

“Every year they should be forced to get up out of bed, and go out and work and make their own way.”

Gina Rinehart

In an ongoing battle over the family trust, one of the world’s richest women, Gina Rinehart, said that her children “lacked the requisite capacity or skill, knowledge, experience, judgment or responsible work ethic” to manage the business and inheritance.

Warren Buffett

As a mega-wealthy investor and respected philanthropist, Buffett has pledged to give away 99 per cent of his wealth, either during his life or on his death. In 1986, he said that he would leave his children “enough money so that they would feel they could do anything, but not so much that they could do nothing.”

He added, “Love is the greatest advantage a parent can give.”

Bill Gates

The Microsoft mogul and his wife Melinda are committed to philanthropy through the Gates Foundation. Their three children will have to largely make their own way in life.

“I knew I didn’t think it was a good idea to give the money to my kids. That wouldn’t be good either for my kids or society,” Bill Gates said in 2010.

Jackie Chan

In 2011, the action movie star announced he would give away half his estimated US$130 million fortune to charity when he dies. Chan added that his son Jaycee would not receive any of those millions.

“If he is capable, he can make his own money. If he is not, then he will just be wasting my money.”

Dan Snow and Lady Edwina Grosvenor

This UK history presenter and his philanthropist wife, a daughter of the Duke of Westminster, the UK’s richest landowner, have hinted at giving to charity rather than burdening their children with great wealth, although they’re not about to leave them paupers.

“You can raise them above subsistence and you can allow them to think about a career that isn’t hugely financially rewarding,” says Snow.

Simon Cowell

Talent show king Simon Cowell has amassed a reported net worth upwards of £300 million, but his newborn son Eric won’t be cashing in at Cowell senior’s death.

In 2013, Cowell said, “I don’t believe in passing on from one generation to another ... I’m going to leave my money to somebody. A charity, probably – kids and dogs.”

Nigella Lawson

Best-selling author and kitchen whiz Nigella Lawson was a millionaire before she married, and spectacularly divorced, art-collecting ad man Charles Saatchi. Her two children will have to support themselves once they finish their schooling.

“I’m determined that my children should have no financial security. It ruins people not having to earn money,” says the domestic goddess.

Andrew Lloyd Webber

The theatre impresario has been quoted as saying, “[A will] is one thing you do start to think about when you get to my age. I don’t think it should be about having a whole load of rich children and grandchildren.” The majority of the musical knight’s £640 million fortune will be set aside to fund arts programs. 

Gloria Vanderbilt

This descendant of US railroad tycoon Cornelius Vanderbilt built her own design and decorating empire, and is rumoured to be worth US$200 million (A$230 million). But she isn’t giving a dime to her CNN anchor son, Anderson Cooper. Admittedly, the well regarded Cooper earns about US$11 million (A$12 million) a year. But he says not expecting any money has been a good thing.

“From the time I was growing up, if I felt that there was some pot of gold waiting for me, I don’t know that I would have been so motivated,” he recently told Howard Stern on radio.

Read next: Getting started with estate planning


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