Greed, arrogance, jealousy, viciousness and inheritances. Generational wealth is a pearl clutching, relationship ruining, and life changing topic which makes it particularly difficult to address among the people who are most important to you; your family. It’s hard to navigate and even harder to transfer especially when it’s a subject often avoided and swept under the rug until it’s too late.
In early June of this year, I had the pleasure of interviewing Jas Butalia, an expert chartered accountant and tax practitioner, with the intention of discussing the tactical avoidance of capital gains tax when I discovered something much bigger. The Great Wealth Transfer.
In terms of generations, the baby boomers are composed of individuals born between 1946 to 1964 and made up the largest demographic of North Americans until 2019 when they were surpassed by the millennials. The Great Wealth Transfer refers to the massive amount of wealth that is to be inherited from the baby boomers as they get older, retire and die.
Jas, who works exclusively alongside family enterprises at WBM Partners LLP, has started to see a worrying trend in recent years. Within his practice, he has seen family businesses cultivate and thrive for decades by one generation only to be pilfered, liquidated and sold by the next. “The next generation simply isn’t ready,” he said, and upon further research into this topic I realized; he was absolutely right. In just 4 years time, $150B in assets are expected to be passed down in Canada. Are we ready for it? Are you ready for it?
Current research suggests that we aren’t with over 70% of wealth transfers ending in failure. Meaning only 30% maintain their familial wealth from first to second generation and staggeringly, only 10% retain it after the third. So what’s the problem? It all boils down to a few things; avoidance, poor planning, and a lack of financial literacy.
As alluded to earlier, inheritance is no easy bridge to cross. A lot of inheritance givers are afraid of their receivers developing a sense of entitlement, becoming unmotivated, giving up on their goals, or becoming resentful if they don’t get what they expect. Statistically speaking, 13% of them are uneasy discussing their death, 15% think that their inheritors aren’t equipped to handle it, and 27% think their inheritor is too young. As a result, only a meager 33% of inheritors are actually made aware that they are receiving an inheritance ahead of time. Prolonging the process though doesn’t solve the problem. By discussing your inheritance with your successors, you’re allowing them the opportunity to adequately plan its acceptance and learn the necessary skills to carry out your legacy. One way to plan and financially prepare for a wealth transfer is to seek help from accountants and advisors. Professionals, like Jas, facilitate estate planning, mitigate income and capital gains taxes that may arise when generational wealth is given and received. It’s their goal to keep your legacy as intact as possible.
Financial literacy starts by being proactive. Most adults begin formally learning about finances by the age of 26 while inheritances from their parents’ generation are passed on at 44. That’s a fair amount of time to become financially literate, however, almost 50% of adults between 35 and 55 don’t feel confident in their financial knowledge and abilities. So what’s the disconnect?
In spite of access to professional resources and advisors, often the most important financial education occurs informally. A successful transfer of wealth should include a transfer of knowledge as well. The ins and outs of running your family enterprise isn’t something a text book can teach; instead practical experience and guidance are the most useful tools. “Fine tune the instrument that you are '' was an expression Jas used frequently in our conversation. After all, only through learning, experience, challenges, and problem-solving do you sharpen your intellect, which is your strongest weapon. It’s by this methodology that Jas has been able to navigate the competitive, and ever evolving environment of tax practitioning. And the business and investing world is no different. By planning and discussing the generational wealth transfer in advance, you can pass on your knowledge, skills, and experiences which are of invaluable importance.
In the case that an inheritor has no desire to continue their family business there are still other opportunities to retain your wealth; for example, real estate investment. For one, real estate is an excellent and predictable source of cash flow. A common tactic is buying and holding; when an investor purchases and rents a property while the land gains value. Once the market reaches its peak, the investor then sells and cashes out. Another benefit to investing in real estate are the tax breaks and deductions. As land appreciates, buildings depreciate in value. Often, land owners counteract their taxed income generated by the property by its depreciation. Overall, real estate investment is a great way to build capital and wealth. The more income streams you have, the more wealth is garnered. By purchasing multiple properties, you increase your streams of income which can also generate more opportunities to buy, rent, sell, and expand.
At the end of the day, it is up to you to determine the direction you want your legacy to go. In terms of passing on your business, it’s important to have open communication, education, and preparation between generations. On the other hand, you can find alternative ways to preserve wealth outside of your family enterprise using means such as real estate to accumulate cash flow and mitigate capital gains tax. Either way, the common denominator between the two options is financial literacy. By fine tuning the instrument that you are, you can reach incredible heights.
A special thanks goes out to Jas Butalia for taking the time to share his vast knowledge and expertise with me. This article would not have been inspired or created without him.
Jas is a chartered accountant and tax practitioner who works with family enterprises to tax and financially plan. He’s a very altruistic individual who’s community motivated which is perhaps why he agreed to an interview with me.
Jas’ interest in accountancy was founded in his grade 8 statistics class, his teacher being a chartered accountant. Overtime he became fascinated with the concept of auditing and pursued his greater education in accountancy. While he was completing his degree, there came the 1971 tax reform that completely changed the industry. Many professionals left the field during this time due to the added complexities that came with tax legislation and the demand, time, and dedication that it required.
In the past 50 years since the reform, this market has evolved drastically into a volatile, competitive and harsh environment. It’s an area of business that needs your full attention and constant will to learn and adapt. Tax practitioning and accountancy requires constant innovation because tax laws change all the time. Techniques Jas used 2 months ago, or even as recent as 4 weeks ago have become outdated. It’s a tactical war in order to mitigate the capital gains tax before the government or your competitors catch up with you. It’s an ever changing battle of chess between the government and your competitors.
Jas currently works with an advisory firm, WBM, to exclusively help family enterprises at different points of their life cycle. These businesses are primarily composed of well-capitalized individuals that come to Jas for aid for a variety of issues; selling shares, financing, estate planning, divorces, transitioning their wealth, among other things.
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