Today’s blog is authored by Chigozie Enwereuzo, Student-at-Law with Hull & Hull LLP
It may not be happening to you specifically but the biggest wealth transfer in Canadian history is currently underway. Many studies conducted over the past decade in Canada by economists conservatively estimate that about $1.1. trillion will be transferred by baby boomers to the Z generation (“Gen Z”) between 2016 and 2026.
The fact that personal assets constituting approximately $699 billion in the form of deposit products, investment funds and direct securities, and $360 billion in real estate assets – primarily residences – will flow into the hands of a generation not generally known to be financially literate or adept at managing wealth of such magnitude ought to trigger concern.
Born between 1996 and 2012, Gen Z is projected to surpass Millennials as the most populous generation on earth with an estimated 78 million individuals. They are the first generation not to know life without the internet and so they are adept at using anything aligned with technology. Despite their youth and low level of financial literacy, the Gen Z have shown a surprising level of financial prudence. This has been attributed to the impact that the 2008 financial crisis and the COVID-19 pandemic have had in their lives.
Their cautionary spending and saving, however, have less to do with any desire to plan for retirement (a project far away in their minds) than it is about wanting to “get rich”. Their penchant for taking uncalculated risks by pouring funds into untested investment vehicles like cryptocurrency, as well as their reliance on investment advice provided by social media influencers and celebrities have led to severe financial losses. They are sometimes mischaracterized as “gamblers” on account of their extensive involvement in high frequency trading as opposed to consistent investing in their quest for high short-term yields.
How Gen Z may preserve their inherited wealth
Arguably, 60% of wealth transfers are lost by the second generation of a family, and 90% of it is gone by the third. Just about 10% of family wealth passes beyond the third generation. These statements transcend countries, continents, and cultures. Their veracity is illustrated by the examples of families such as the Vanderbilts, the Guiness family, the Astor family as well as the Habsburg family whose fortunes plummeted by their second and third generations. With this knowledge, it makes sense to proactively take deliberate action to stem Canada’s massive wealth transfer from being another one for the story books.
Every family currently in the process of passing on intergenerational wealth should consider equipping their Gen Zer’s with the appropriate information and knowledge they require to preserve and transfer the inheritance. Knowing full well that Canada’s overall financial environment, income tax regulations, and estate tax laws will not remain static over a three-generation timespan, the best recommendation would be to utilize, primarily, only tried, and tested wealth preservation and transfer tools.
Tested wealth preservation and transfer tools that also mitigate tax burdens include tax-advantaged accounts such as RESPs and RRSPs, or a savings plan that is tax-exempt or tax-deferred. Trusts are especially great tools when planning wealth transfer strategies. By employing the advice of a capable estate planner, those in Gen Z can avoid being subject to gift tax, estate tax, and generation-skipping transfer tax if the assets remain in a trust.
Above all, the foundation to ensuring that the Gen Z will preserve and transfer the current wealth they are inheriting is the inculcation of financial literacy. For the Gen Z, the vehicle for their engagement is smarter financial education that is tailored to their technology-reliant lifestyle.
Thank you for reading!
Chigozie Enwereuzo, Student-at-Law