How can advisors prepare young Canadians to inherit wealth?

Many people in their 20s, 30s, and even 40s are struggling with inflation. Increased prices make it challenging and difficult to save for the long term. At the same time, they may be focused on shorter-term goals, such as home ownership, that put longer-term goals, such as retirement, on the back burner. Yet, in the midst of these financial challenges, some are poised to inherit as the great wealth transfer moves money from baby boomers to younger generations.

Are young Canadian adults ready? If not, how can advisors help?

Andrew Gardiner, Senior Regional Sales Director with Beneva, says young adults are not well prepared to inherit — but, he emphasizes, it’s not their fault.

“The current owners of that wealth are statistically ill-prepared [to transfer wealth]. The number of people who may not have an estate plan or even a will…is quite high. So, we can’t really turn around and expect the next generation, who are going to be the recipients of this intergenerational wealth transfer, to be prepared if the parents aren’t prepared.”

Putting any blame aside, that lack of preparedness opens families up to what Gardiner describes as “friction costs.” The solution is proactive, comprehensive financial planning — including estate planning — that will ultimately support the next generation’s financial security.

Best practices balance the needs of all generations

Since advisors are in the best position to ensure a smooth wealth transfer that is efficient, minimizes taxation, and helps protect family harmony, they have an important role to play in guiding clients on both sides of the generational divide.

The older generation must plan for their own needs first, Gardiner says. They need a comprehensive financial plan that ensures they’ll have sufficient funds for life, without requiring the next generation to step in with financial support.

With their lifetime needs assessed and planned for, the older generation can turn their minds to estate planning. That may encompass gifts during life and gifts to charity, as well as the smooth transfer of assets to their heirs upon their death.

Within an estate plan, there may be an investment component and an insurance component. Gardiner finds it helpful to think of the latter as “insurance-based contracts,” which he defines as assets on which you can directly name a beneficiary — for example, life insurance or a segregated fund.

Using insurance-based contracts allows that portion of wealth transfer to bypass the estate, skipping probate fees (in provinces where they apply), as well as costs such as accounting and executor fees, and allowing money to move to the next generation speedily — in a few weeks rather than perhaps a year or two. The transfer is also private, reducing the probability of legal challenges and family disputes. And, importantly, “we’ve laid out the glide path at the point of application,” he says.

Some estate planning strategies specifically help to protect young adults’ long-term financial well-being. For example, annuity settlements can be structured to provide the next generations with both a lump sum and annuity payments over a set period of time or for life. That’s helpful when parents aren’t confident in adult children’s or grandchildren’s ability to prudently manage a big amount of money received all at once.

Providing wide-ranging advice enhances your value

Without professional guidance, many people simply won’t know about the variety of estate planning tools available to them to solve different challenges, Gardiner says. Meanwhile, providing wide-ranging advice and encouraging intergenerational conversations help advisors set their practices up for future success.

“The reality is that if a financial advisor doesn’t have a relationship with the beneficiaries, the chance of them retaining those assets is virtually zero,” says Gardiner. “Creating estate-friendly plans [is] 360-degree winning” — with clients, beneficiaries, and advisors all benefitting.

Furthermore, there’s a significant difference between the value clients and beneficiaries perceive when they’re working with an advisor focused primarily on investments versus when they’re partnering with an advisor who looks more broadly at other solutions, including insurance, that help them strengthen their financial position beyond rates of return.

“A lot of money is going to be transferring hands over the next several years. The demographics dictate that,” says Gardiner. “If you did the work required to make sure the client was taken care of and the beneficiaries were taken care of, then you stand a very good chance that your business will be protected.”