The great wealth transfer: risks, challenges and opportunities

As today’s older generation prepares to hand over trillions in assets to millennial and Gen X heirs, meticulous planning can help build vision and purpose

Almost a quarter of the way through the 21st century, high-net-worth (HNW) and ultra-high-net-worth (UHNW) individuals are preparing to hand over trillions of dollars to their children and grandchildren in the biggest wealth transfer in history. In the US alone, an estimated $84tn is set to be passed from the baby boomer generation to millennial and Gen X heirs between now and 2045. Of that, about $16tn of wealth will be transferred over the next decade. Across the UK and Europe, it is a similar story.

Yet, as younger generations prepare to inherit vast sums of wealth, the future has never been harder to parse. Global geopolitical tensions are on the rise. The sudden emergence in 2020 of Covid-19 has served as a reminder of how fragile business models and supply chains can be. The unknowns surrounding artificial intelligence, as well as the implications of climate change add yet more complexity to an already challenging outlook.

Against that backdrop, how can today’s older generations of wealthy and ultra-wealthy individuals build a vision and purpose to create a lasting legacy and impact – all while future-proofing their assets? Armando Rosselli, Head of Wealth Advisory and UK Resident Non-Domiciled Clients, Standard Chartered Private Bank, argues that answering that question involves understanding the rapidly changing makeup of wealthy families.

The changing wealth creation cycle

For one thing, the wealth creation cycle has shortened, with individuals and families now often accumulating substantial wealth over a single generation rather than several. This is particularly the case in Emerging Markets and Asia, which has seen an explosion of UHNW individuals, with Asia accounting for an estimated 29.1 per cent of the global total by 2027, compared with just 15.2 per cent in 2004. “Faster wealth creation means there is more wealth that needs to be structured faster,” says Rosselli. “It also implies that many of today’s wealthy are entrepreneurs, so their wealth is not constrained in the way that it might have been in the past.”

Faster wealth creation means there is more wealth that needs to be structured faster

A second aspect of growing complexity in the makeup of UHNW families is that they and their assets are more geographically spread out than ever before, with members living in different jurisdictions, and wealth being created in different locations, all of which can have a significant impact on the mechanics and tax and legal implications of wealth transfer.

Defining a vision – creating a legacy

All of this, says Rosselli, increases the importance of taking steps to create a sense of purpose that can help to crystallise a vision – and ensure that it can underpin a legacy that will endure. “You have to be able to understand the purpose of your family’s wealth,” he says. “Done properly, purpose can build bridges, reduce potential differences between generations and help to safeguard and even grow wealth over time.”

Dr Fiona Fairbairn, Researcher in the Centre for Philanthropy at the University of Kent, says that philanthropy can provide a powerful uniting force for many families contemplating wealth transfer. “A lot of people see philanthropy simply as a tool to offset privilege or to give back,” she says. “But that misses a much bigger opportunity in its ability to bring different generations together around a shared purpose.”

A lot of people see philanthropy simply as a tool to offset privilege or to give back

To help frame that shared purpose, it is essential that families work together and document this. Rosselli of Standard Chartered says a family charter or a constitution can be useful to enshrine clear thoughts and dynamics without necessarily being too prescriptive. “This allows them to build the legacy they want to endure over generations, while factoring in the flexibility needed for family members to innovate,” he says.

At their most fundamental level, family constitutions can also clarify what wealth means to a given family, and what it should be used for – from how elders would like their children to use that wealth to the way in which wealth defines the family’s relationship to the wider society. Ultimately, they can be more about the importance of transferring values than the conferral of financial wealth.

Establishing a plan early on

A well-considered and documented vision will support a family or family office in retaining clear objectives for the family wealth, defining existing investments and income streams, and also potential new investment opportunities. This is particularly the case if a family has an existing business and family members want to branch into ventures that complement core activities. “A family office becomes a centre of gravity, the glue that sticks things together for a long-lasting legacy,” says Rosselli.

A family office becomes a centre of gravity, the glue that sticks things together for a long-lasting legacy

So when is the ideal time to start thinking about all of this? The short answer is that it is never too soon. Taking steps while children are still young creates more opportunities to unite family members in shared goals. As Rosselli concludes: “The sooner upcoming generations get involved, the greater the likelihood that you are going to achieve the continuity and vision you are looking for.”

This content was paid for by Standard Chartered and produced in partnership with the Financial Times Commercial department