How To Create Generational Wealth

How To Create Generational Wealth With Property

Owning property in Australia is a dream for many, but the complexities surrounding property ownership, wealth management, and the eventual transfer of wealth between generations (often referred to as Generational Wealth), are often underestimated. As an experienced financial planner, I have witnessed how the evolving landscape of financial planning, property investment, and wealth transfer is reshaping the way Australians approach their finances. As a result, how to create generational wealth is a question I’m regularly asked.

This blog draws insights from a recent conversation with my colleague, Zareh, a fellow financial planner and mortgage broker at Manly Financial Services. In our discussion, we delved into the intricacies of property ownership, the benefits of various structures like trusts and companies, and the challenges surrounding wealth transfer.

We explored real-life examples of how financial planning can save clients thousands in taxes and how understanding the right structures can lead to more efficient wealth management. Here, I’ll share those insights and help you better navigate these topics, focusing on the unique Australian financial context.

Property Ownership Structures: Trusts, Companies, and Personal Ownership

One of the key topics we covered in our discussion was the importance of choosing the right entity for property ownership. When you’re considering buying property, it’s essential to understand the different structures available and the tax implications each brings.

1 – Personal Ownership

When purchasing property as an individual, the process is relatively straightforward. You’ll be assessed on your personal income, and the serviceability of your loan will depend on your earnings and expenses. The income from the property will flow directly into your personal tax return. If you own the property jointly with a spouse or partner, the income will be split according to ownership proportions, and each party will pay tax on their share of the income.

Personal ownership is the simplest method, but it may not always be the most tax-efficient, especially for higher-income earners. As we discussed, individuals earning in the top marginal tax bracket (currently 47%) may be paying significantly more tax on property income than they would if the property were held in a more tax-efficient structure.

2 – Owning Property in a Trust

Using a trust to hold property can offer greater flexibility, particularly when it comes to distributing income. One of the key advantages of a discretionary family trust is that the trustee has the discretion to distribute income among the beneficiaries in a tax-efficient manner. For instance, if one spouse is on a high income and the other is not working, the income from the property can be allocated to the lower-income spouse, resulting in a lower overall tax burden.

Trusts are also beneficial for asset protection. If an individual is involved in a high-risk profession where the potential for lawsuits or financial claims is higher, holding property in a trust can protect these assets from creditors. However, not all lenders are comfortable with trust structures, and securing finance may be more challenging compared to personal ownership.

3 – Owning Property in a Company

Owning property through a company is another strategy that can provide advantages in certain situations. In particular, companies are taxed at 25 – 30% for most small businesses in Australia, meaning high-income earners can potentially save on taxes by holding property in a company. Additionally, unlike a trust, a company can retain profits, which means you don’t need to distribute the income in the same financial year.

However, one major disadvantage of holding property in a company is the loss of the capital gains tax (CGT) discount. When property is owned by an individual or a trust, you may be eligible for a 50% CGT discount if the property is held for more than 12 months. This discount does not apply to companies, meaning that if you sell the property at a profit, you’ll pay full CGT on the gain.

Financing Property Through Trusts and Companies

One of the challenges we touched on in our conversation is the difficulty in securing finance when purchasing property through a trust or company. Many banks are hesitant to lend to these entities because they perceive higher risk compared to personal ownership. Even if finance is available, it often comes with stricter lending criteria and potentially higher interest rates.

However, it’s not impossible to get financing for a property held in a trust or company. Lenders will often require personal guarantees from the beneficiaries or directors, meaning they’ll assess the serviceability of the loan based on your personal income, even though the property is held in a separate entity.

The Importance of Asset Protection and Wealth Transfer Planning

Beyond property ownership, we also discussed the importance of asset protection and planning for intergenerational wealth transfer. As life expectancy increases and Australians accumulate more wealth over their lifetimes, ensuring that wealth is passed down efficiently to the next generation has become a central concern for many clients.

1 – Asset Protection through Trusts and Companies

One of the main reasons people choose to hold property in a trust or company is for asset protection. In professions where there’s a risk of legal action or significant financial liability, holding property in a separate entity can shield those assets from creditors.

For example, in a trust, the property is owned by the trust, not by the individual. This means that if the individual is sued or declares bankruptcy, the property is generally protected from those claims. This peace of mind can be invaluable for business owners, professionals, and anyone in a high-risk industry.

2 – Efficient Wealth Transfer

One of the real-life cases we discussed involved a client who inherited multiple properties from their parents. Due to the way the properties were structured, the client was initially faced with a significant tax bill. However, after reviewing the situation, we found that the properties were eligible for significant CGT exemptions, saving the client nearly $350,000.

This story highlights the importance of having a financial planner involved in the wealth transfer process. Even if you’re comfortable with your accountant, having a second set of eyes on complex tax issues can make a substantial difference. Proper structuring of assets before the death of the original owner can ensure that beneficiaries don’t face unexpected tax liabilities and can continue to benefit from the inherited assets.

3 – Superannuation and Estate Planning

Superannuation plays a key role in wealth transfer, particularly when it comes to tax efficiency. In Australia, if a superannuation balance is passed on to a non-dependent beneficiary (such as an adult child), the estate could face a tax of up to 17%. However, with careful planning, you can minimise or even eliminate this tax by transferring superannuation balances before death or by ensuring that the right structures are in place to protect beneficiaries.

Education and Communication: The Foundation of Multigenerational Wealth

One of the most significant challenges we see with clients is the lack of education around wealth management and investment strategies, particularly for the younger generation. Many adult children are unaware of the financial decisions their parents have made or don’t fully understand the structures in place to manage the family’s wealth.

Education is key to maintaining multigenerational wealth. It’s not enough for parents to establish trusts, companies, or other investment vehicles if their children don’t understand how these structures work or why they were set up. As financial planners, we believe that a crucial part of our role is to educate clients and their families, ensuring that wealth is preserved and transferred effectively across generations.

Final Thoughts: The Value of Financial Advice

The world of property ownership, asset protection, and wealth transfer can be complex, but with the right advice, it’s possible to navigate these challenges successfully. Working with a financial planner who understands both the personal and tax implications of different structures can save you significant time, money, and stress.

If you’d like to discuss your property ownership or wealth transfer plans, don’t hesitate to reach out to us. Financial planning isn’t just about the here and now—it’s about building a legacy for the future.

Important Disclaimer: The information provided in this article is general in nature and does not constitute financial advice. Please consult with a qualified financial advisor to discuss your individual circumstances.