Over the past number of years, BMF Wealth’s Estate Planning and Wealth Management teams have been inundated with requests regarding consulting services for Estate Plans and investment management on the wind up of the Estates.
Due to the legal nuances around areas such as tax, family law and superannuation and with the added complexities of managing investments in today’s environment, we have provided commentary below relating to the investment management of an inheritance.
This is particularly relevant to large estates.
From Grief to Responsibility
The passing of one’s parents, grandparents or spouse is a time of deep grief and reflection as it takes a heavy emotional toll. While experiencing deep anguish, it delegates a significant number of new responsibilities onto the next generation or surviving spouse, often at an unexpected time and often without any prior training or education on how to handle such responsibilities.
This ranges from funeral arrangements to managing relationships across family members, both close and distant. However, once those initial tasks are taken care of, often the most significant responsibility is managing the estate passed onto the next generation or spouse, particularly if it’s of a significant size.
After both parents have passed, it is most often the children and grandchildren who are beneficiaries of the estate. When it is one parent who has passed, it is usually the surviving spouse and sometimes the children of the current and/or previous marriage who are the beneficiaries.
While there are several strategies on how to best facilitate the transfer of wealth between generations depending on many factors including age and circumstance, this article will not discuss these measures but will instead focus on the subsequent investment management of the estate for the benefit of current and future generations.
Education and Handholding
It is often said that after the family doctor, the wealth advisor is the closest professional to the family. As BMF Wealth has managed the inheritance of many families, including across multiple generations of the same families, we realise there is no one-size fits all solution to managing an inheritance.
The first step is understanding the family’s needs, investment experience and sensitivities. There is sometimes an existing relationship between the advisor and the family and sometimes the relationship is only established at the time of inheritance being received, often referred on from an estate lawyer or family friend.
It is difficult to make financial decisions at the best of times, let alone during a time of grief. It is therefore our responsibility to hold your hand, explain the various steps involved, be patient, take small steps, and educate the beneficiaries on the different options, asset allocations, risks and financial jargon.
Protecting Your Inheritance
It is often said that the first generation makes it, the second generation spends it and the third generation blows it. With education and sound management, this can easily be avoided.
An estate passed on to the next generation has sometimes been built over several decades and generations via employment, business activity and prior investments. It therefore should be taken seriously by beneficiaries as it is a large responsibility to protect and grow that capital without risking the decades of hard work taken by previous generations.
There are usually three main concepts to consider when investing:
- Protection of capital
- Capital growth
- Producing a sustainable income while reducing risk
Firstly, how each of the above concepts interact with one another depend on the risk profiles of the beneficiaries of the estate. For example, beneficiaries in their 20s have a longer time horizon, can accept additional risk, focus more on capital growth and often have many other priorities on their mind, such as travel, career and romance rather than managing the estate. A more established beneficiary in their 60s, such as a surviving spouse or children of the deceased, may consider needs such as higher liquidity and a more balanced approach to investing, including a greater allocation to income producing assets. They may also have already built their own estate and have more experience in investing.
Younger beneficiaries who have entered the workforce in the past 15 years have also contended with major economic collapses such as the 2008-2009 Global Financial Crisis and the 2020 Covid-19 pandemic, shifting risk appetite of the share market for the less experienced as volatility increases.
At BMF Wealth, we understand the key to a successfully managed portfolio is asset allocation first and foremost. Without a crystal ball to know how the future will actually turn out, asset allocation is used to generate more consistent returns while reducing overall risk and volatility. The selection of individual investments comes later. This would include investments in shares, fixed income, the private markets such as private equity and real estate (commercial and multi-family) and gold.
As Australia constitutes approximately 2% of the global markets, we also encourage looking overseas for opportunities to spread risk across asset class, investment, custodian and jurisdiction. This does present the added risk of currency movements but with professional advice, this can be managed effectively.
Receiving an inheritance can be a daunting experience conflicting with raw emotions of losing a loved one.
The world is a fluid place that is constantly changing and it feels that the future is as uncertain as ever. It is therefore incredibly important to consult a professional such as BMF Wealth to protect and grow your family’s assets.
Please contact us should you wish to discuss establishing an estate plan and/or managing an inheritance portfolio of $2 million or more. Please note we only act for wholesale investors as defined by the Corporations Act 2001, which includes investors with net assets of $2.5 million or more (this figure includes your home net of debt) or has gross income for each of the last 2 years of at least $250,000 each.
Disclaimer: Any advice included in this article is general in nature and has been prepared without taking into account your objectives, financial situation or needs. We recommend seeking a professional adviser with respect to the management of an inheritance and preparation of an Estate Plan.
This publication has been prepared by BMF Asset Management Pty Limited (ACN 092 277 971, AFSL 224035), to provide you with general information only. In preparing it, we did not take into account the investment objectives, financial situation, or particular needs of any person. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information without consulting us or your financial adviser.