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The vast wealth transfer

Estate planning, philanthropy and the impending vast wealth transfer: What financial advisers need to know, writes Patrick Gamble, CEO, Perpetual Guardian Group.

Alot has changed in the legislative landscape of trusts in recent months, and many of the changes directly affect those providing financial advice and their clients. Here we present the mustknow information for financial advisers navigating the altered terrain:

Do financial advisers have an obligation to introduce estate planning in discussions with clients?

Legally, no – but there is a strong case that any substantial conversation about long-term financial planning should include estate planning. This goes to people’s objectives for their retirement, how they want their loved ones to be cared for, and whether they want to leave a legacy beyond their family, such as through a charitable trust.

Certainly, anyone who is seeking the services of a financial adviser will likely be in a position to need a Will (if they don’t already have one); whether they are buying a risk insurance policy such as life insurance, taking out a home loan, or simply have $15,000 or more in assets, including KiwiSaver, a Will is an essential document to spell out their wishes and spare their loved ones the trauma and expense of going through the courts in the event of intestacy. It is also crucial for those with children, addressing issues of guardianship.

If someone dies intestate, the law determines who will inherit their property and possessions, and the size of the estate will need to be determined, an administrator chosen, and court authority for administration obtained before the estate can be administered and distributed. This can be a timeconsuming and costly process which is avoidable if a Will is in place.

Given the cost of indemnity insurance, along with the other risks arising in the new legislative environment, is it worth continuing as trustee?

These days, Wills can be made, updated and stored digitally if clients prefer and, typically, the earlier in life one is made, the quicker and more straightforward it is. Then it is just a matter of updating the document in line with major life changes such as marriage, the birth of a child, or the sale or purchase of a significant asset.

What should be top of mind for advisers in relation to the new Trusts Act 2019?

The purposes of the new Trusts Act 2019, which came into effect in January, include making trust law more accessible and clarifying and simplifying core trust principles and essential obligations for trustees.

Many financial advisers in New Zealand, along with lawyers and accountants, serve as professional trustees for clients with family trusts, and the new Act makes executing that role more onerous with new requirements for more accountability from trustees and increased costs of running a trust, because administration now requires more attention.

If you are a professional trustee you need to ask yourself some important questions:

• Is the cost of administering this trust in balance with the benefit to the beneficiaries of having the trust? (Not every trust should continue as-is; some should be wound up and others re-settled.)

• Given the cost of indemnity insurance, along with the other risks arising in the new legislative environment, is it worth continuing as trustee?

• Is your business sufficiently resourced to meet the increased obligations?

• How are you managing the new requirements for trustees in relation to proactive disclosure of information to beneficiaries? Do you have the capacity to do this in a timely manner?

What is the best way to address philanthropy in financial advice conversations?

It is a good idea to discuss philanthropy as part of any estate planning conversation, to understand whether a client would like to make charitable bequests in their Will or go a step further and set up a charitable trust, which can be done during their lifetime or in accordance with specifications made in their Will, and actioned during the execution process.

The former is straightforward, completed as part of the distribution of the estate. The latter will require a more in-depth understanding of the client’s philanthropic intent; which specific causes or organisations they wish to support or name as beneficiaries; and how they wish the trust to be structured and managed.

As with family trusts, it is strongly recommended that charitable trusts have a professional trustee who is experienced and fully conversant with their obligations under the Trusts Act 2019, and who also has experience in managing the grant application process and distributions from charitable trusts, which in the case of large trusts can constitute substantial amounts over time.

The advantage of using a professional trustee experienced in philanthropic management, such as Perpetual Guardian (New Zealand’s largest philanthropic entity by volume), is that we have the knowledge and relationships to ensure every philanthropic dollar has maximum impact in its sector, and trusts are properly structured and managed so investment holdings are grown and leveraged to full effect over time.

How does the impending wealth transfer from baby boomers to their inheritors affect the financial planning picture?

Globally, the distribution of wealth from the baby boom generation (roughly, those born between 1946 and 1964) represents the greatest wealth transfer in history. New Zealand is no different, with significant wealth being held by boomers, much of it in residential property. Statistics NZ data shows nearly twothirds of household net wealth was in the hands of those aged 55+ in mid-2018 (with relative increases in house prices, this will have grown considerably over the past three years).

A sound estimate made in recent business reporting is that this generation will transfer around $1.15 trillion in wealth (including through charitable trusts, donations and bequests), in today’s dollars, over the next two decades.

The oldest baby boomers are now approaching their later 70s, so some of the projected wealth transfer has already begun, including via “the bank of mum and dad”, wherein cashed-up older parents are helping their adult children fund their own property purchases.

Statistics NZ data shows nearly twothirds of household net wealth was in the hands of those aged 55+ in mid-2018

Based on Perpetual Guardian’s estimate that New Zealand has between 350,000 and 500,000 family trusts, it is safe to calculate that a large proportion, perhaps even a majority, of baby boomer wealth is held in trust. The Trusts Act 2019, with its emphasis on trustee obligations, beneficiary disclosure and mandatory administration, will have had a nullifying effect on many of these trusts, which now won’t be managed in compliance with legislative requirements.

More importantly, all financial advisory conversations with those 55+ – or whose parents or grandparents are in this cohort, and who may be inheritors – must consider the ramifications of wealth transfer and make a clear, adaptable plan for how wealth will be distributed to the next generations. This should include a discussion as to whether the client wishes to make a direct, unimpeded transfer of wealth upon their death, or whether they would like to place some constraints on financial distribution, such as through an independent professional trustee who can supervise the dissemination of wealth more gradually.

As we all know, families can be complicated, especially where money is concerned, and for some families, a wholesale distribution of potentially significant wealth directly to a handful of individuals might not be desirable. Don’t hesitate to talk this through with clients or to solicit the advice of a professional trustee where necessary.

Patrick Gamble was appointed CEO of Perpetual Guardian in 2020. Previously, as Complectus Group General Counsel, he spent more than six years building the group through a series of acquisitions and integrations and fronting the group’s relationships with investors, regulators, government, advisors and media. Earlier in his career Patrick practised law at Russell McVeagh and worked for international law firms in Dublin and Malta, specialising in corporate and commercial law, capital markets, joint ventures and shareholder arrangements.