Australia stands on the brink of an unprecedented intergenerational transfer of wealth, with an estimated $5.4 trillion expected to change hands over the coming decades.
This massive shift in assets from Baby Boomers to younger generations is unfolding more rapidly than anticipated with reports indicating that Baby Boomers are exiting the workforce at an accelerated pace.
The wealth transfer is expected to unfold swiftly:
- By 2028, most Baby Boomers will have left the workforce.
- In 2027, the first Baby Boomers will reach their statistical life expectancy.
- Superannuation balances of Baby Boomers will begin to decrease due to retirement consumption and inheritance disbursement.
- The transfer of inherited assets is estimated to grow from about A$120 billion per year to nearly A$500 billion per year over the next 25 years.
- The average age of inheritors is 50 years old, placing them in the Gen X demographic.
- By 2030, there will be an additional 84,000+ ‘older workers’ aged 65 and above in the workforce.
Three main factors are fuelling the growth in inheritances:
- Greater wealth accumulation
Since 1980, there has been a massive asset boom. Shares have catapulted, housing has exploded and alternative assets such as gold, Bitcoin and art have also performed well. - Demographic shifts
A large cluster of Baby Boomers entered their prime during the early years of the asset bull market. Now, they are mostly retired and passing on their wealth via gifts and inheritances.
Low inheritance taxes
Australia abolished its inheritance tax in 1979 and currently does not impose any inheritance or estate taxes. In contrast, both the United States and the United Kingdom still have estate or inheritance taxes, but their significance has diminished over time.
While there are no inheritance or estate taxes in Australia, there is potentially 15% or 30% (plus Medicare) tax on certain components of death benefits paid from super to a non tax dependant (most likely adult children).
Obtaining advice and structuring your affairs appropriately may reduce or eliminate this potential tax to these beneficiaries.
The Australian housing boom has played a significant role, with housing comprising about 56% of Australia’s total wealth.
‘Baby Boomers have the highest levels of home ownership, being three times more likely to own their homes outright compared to Millennials at the same age.’
Consequences of the wealth transfer
This unprecedented transfer of wealth is leading to various economic and social challenges:
- Low economic productivity
With significant wealth tied up in housing and superannuation, there’s less investment in potentially more innovative and productive areas of the economy. - Increasing inequality
The Household, Income and Labour Dynamics in Australia (HILDA) survey shows that inequality has reached 20 year highs, partly due to rises in housing and super outstripping incomes and inflation. - Declining fertility rates
The high cost of housing may be contributing to lower birth rates as younger generations struggle to afford both homes and children. - Reduced social mobility
The Productivity Commission notes that wealthier parents tend to have wealthier children, even without direct wealth transfers. Inheritances strengthen this relationship, potentially impeding social mobility. - Changes in marriage patterns
Overseas studies suggest that inheritances are becoming more important in people’s choice of spouse, although comparable research in Australia is lacking. - Increased risk taking by younger generations
Younger people are taking on greater risk by investing in speculative assets such as meme stocks and cryptocurrencies, possibly influenced by observing how the wealthy have primarily built their fortunes through asset appreciation rather than career building.
Why are we talking about this?
As the wealth transfer unfolds, it’s crucial for Will makers to ensure their estate plans are up to date and legally sound to minimise the risk of disputes.
Will disputes are on the rise as the value of estates increases. Please read our additional article on ‘The rising tide of Will disputes’. With more people likely to contest Wills, taking proactive steps to protect your legacy is essential.
By regularly reviewing and updating your Will, communicating clearly with your family and seeking professional advice, you can significantly reduce the risk of disputes and protect your legacy for future generations.
It’s generally recommended to review your Will every three to five years, or whenever significant life events occur. So if this is you, we encourage you to take action now.