The Great Wealth Shift: Navigating Australia’s largest intergenerational wealth transfer

Key takeaways

Australia, like the rest of the world, is about to experience a significant transfer of wealth, estimated at around US$68 trillion globally and A$3.5 trillion in Australia alone over the next few decades.

The amount Australians inherit annually is projected to quadruple in the next 25 years, largely due to rising property values.

The great wealth transfer presents both challenges and opportunities, emphasizing the need for continuous assessment and adaptation of economic and social structures.

Estate planning is crucial to ensure assets are distributed according to the wishes of the owner.

Australia, along with the rest of the world, is on the cusp of the largest intergenerational wealth transfer in history.

Termed as the “great wealth transfer,” we're looking at an eye-watering US$68 trillion (A$100.2 trillion) moving hands globally over the next 20-30 years.

This shift, predominantly from the baby boomer generation, is not just significant in its magnitude but also in its potential economic and social impacts.

The Australian Scenario

In our backyard, the figures are just as staggering.

The Productivity Commission’s 2021 report highlights an expected A$3.5 trillion asset transfer in Australia by 2050.

This enormous transfer will predominantly involve residential property, unspent superannuation funds, and other investment assets.

Currently, Australians inherit about A$120 billion annually, a figure projected to quadruple to nearly A$500 billion per year within 25 years.

This jump is in part due to the anticipated continuous rise in property values.

The Global Context and Its Implications

Globally, the US is set to witness an enormous transfer of US$84.4 trillion (A$128 trillion) by 2045, including substantial amounts in charitable donations.

This monumental shift raises crucial questions about its broader economic and social implications, particularly concerning wealth inequality.

Interestingly, wealth transfers in countries with high living standards and robust welfare systems, like Australia, tend to impact inequality differently compared to their less affluent counterparts.

The Productivity Commission has observed that wealth transfers in Australia are actually reducing certain measures of relative wealth inequality.

Catherine de Fontenay, a commissioner at the Productivity Commission, provides a revealing insight explaining that for individuals in the bottom fifth of wealth distribution, an average inheritance of $3,500 can be life-altering, considering their average wealth is around $7,200.

In contrast, for those in the top quintile with an average wealth of $1.3 million, an average inheritance of $121,000 is less impactful.

The Role of Asset Prices and Government Policies

Asset price growth, especially in housing, significantly influences wealth inequality.

De Fontenay notes that baby boomers have especially benefited from this growth.

However, inheritances, typically received later in life, have limited influence in shaping life choices and opportunities, thereby playing a smaller role in wealth correlation across generations.

Bringing forward the inheritance

Taxation and Inheritance

Government policy and taxation are pivotal in shaping the landscape of wealth inequality.

Australia, currently without formal inheritance or wealth taxes, still imposes taxes on certain asset transfers.

For example, capital gains tax (CGT) may apply to investment properties inherited from a deceased estate, and income tax on dividends or rental income from inherited assets.

Fact is, everything subject to CGT in the hands of the deceased faces a CGT event at death.

International Perspectives

In contrast, countries like the UK and the US have more direct approaches to inheritance taxation.

The US has an estate tax with rates up to 40% on personal assets exceeding US$12.92 million (A$19.6 million).

The UK imposes a 40% inheritance tax on assets over £325,000 (A$594,500), with certain exemptions.

Looking Forward

This impending wealth transfer, unprecedented in scale, offers both challenges and opportunities.

It’s crucial to continuously assess and adapt our economic and social structures to ensure equitable wealth distribution and capitalize on the potential economic benefits.

The decisions made today will shape the financial landscape for generations to come.

The team at Metropole Wealth Advisory  specialise in helping Australians with estate planning to ensure their assets fall into the hands of their intended beneficiaries.

About Chris Dang Chris Dang is an accountant by training and has worked in the Financial Planning industry for many years. Chris brings together property, accounting, and financial planning experience to help clients of Metropole Wealth Advisory create a holistic plan for their wealth.