How to Prepare for the Biggest Generational Wealth Transfer in History
By David Koch, CFP®, AIF®, CFA, Director of Portfolio Management/Senior Wealth Advisor
The Great Wealth Transfer is on its way. Estimates suggest that as much as $30 trillion worth of wealth could change hands in the coming few decades.
What is the Great Wealth Transfer?
First, let’s back up a bit. Wealth transfer refers to the passing of assets from one generation to the next. This has been going on since the rule of law, but it is expected to accelerate in the coming years as the Baby Boomer generation reaches retirement age and begins to pass on their wealth to their children and grandchildren, generating this massive transfer of wealth .
What Makes the Great Wealth Transfer the Biggest Generational Wealth Transfer in History?
Advances in healthcare and technology have allowed people to live longer, which means that this process is likely to take longer than in the past. We may be seeing the first generation of octogenarians still waiting to inherit their parent’s assets.
Increasing wealth inequality has led to a concentration of assets in the hands of a smaller number of people. As these individuals reach retirement age and seek out ways to mitigate U.S. estate taxes, they will likely begin to pass on much of their wealth before they pass away. The Great Wealth Transfer has significant implications for both individuals and society as a whole.
For individuals, wealth transfers create an opportunity to build and preserve wealth for future generations. For a society, this massive intergenerational wealth transfer has the potential to exacerbate wealth inequality if the wealth is not distributed in a way that promotes economic growth and social mobility. In many ways, this is literally what the estate tax attempts to accomplish. It forces people to distribute wealth beyond their own kin, often incentivizing transfers through vehicles such as charitable contributions, which can and will have profound societal implications.
The most obvious example is The Giving Pledge, formally announced in June 2010 by Bill Gates, Melinda French Gates, and Warren Buffett. In just two months, 40 people had pledged $125 billion, and as of June 2022 the pledge has 236 signatories from 28 countries with an estimated total of about $600 billion. These pledges are going to change the world in many ways. The motivations vary from very specific – like curing diseases that pharmaceutical companies are otherwise not incentivized to cure (think: Bill and Melinda French Gates) – to the concept of “noblesse oblige,” a French term for the idea that being wealthy creates a duty to share that wealth and lift up others.
Wealth Transfer Planning – What to Consider
The process of preparing for the transfer of wealth should be planned for. It involves identifying and addressing challenges and opportunities that may arise through this process, and developing a strategy for managing and preserving wealth for future generations. There are several key factors to take into account. One of the most important is the value and composition of the assets that will be transferred. These may include highly illiquid assets like real estate and business interests, but also financial investments. Some assets just aren’t neatly divisible.
Another significant consideration is the tax implications. Estate and gift taxes can significantly reduce the value of assets being transferred; it’s important to understand the tax laws and regulations that apply and develop a strategy that minimizes tax liabilities.
Finally, it’s critical to consider the beneficiaries of the wealth transfer. Identifying and understanding the needs and goals of all the beneficiaries will help to ensure that the wealth is distributed in a way that aligns with the values and goals of the family.
Here’s a tax-related client experience. This client had two children with significantly different tax brackets. We poured over models in which the child in the higher tax bracket would receive a higher proportion of tax-exempt assets, like their Roth IRA. The child in the lower tax bracket would get a higher proportion of the tax-deferred assets like the Traditional IRA.
From an after-tax perspective, this was a good strategy. But from in inter-family relationship strategy, it’s a terrible idea. One child is going to get a bigger dollar amount than the other child; I’m not confident that the after-tax argument would be entirely appreciated. After all is said and done, “mom and dad gave you more.” We split everything 50/50.
Avoiding Mistakes in Your Wealth Transfer Planning
These are some common mistakes to avoid:
- Not having a plan. Without a plan, assets may not be distributed according to an individual’s wishes, and taxes and other expenses may not be accounted for or minimized.
- Waiting too long to plan. Another common mistake is waiting until it’s too late. Many estate planning strategies require years to implement, and even better yet, decades. This also allows you to adjust the plan along the way.
- Not considering tax implications. This can result in a significant portion of the assets being lost to taxes. Beyond the federal estate tax exemption of approximately $12 million per person (which is slated to go back to about $6.2 million in 2026), the estate tax reaches 40% quickly.
- Not involving the beneficiaries. This can lead to misunderstandings and conflicts later on. Keep in mind that your intentions will often be read to them through a will or a trust, and you may not be there to provide any context for the decisions that you’ve made. It’s important to communicate with the beneficiaries and make sure that their needs and goals are taken into account.
- Not updating the plan. This is critical, since tax and estate laws change periodically – arguably far more frequently than they should (no thanks to Congress). It’s imperative to review and update the plan regularly, especially after material changes in the law.
- Not seeking professional advice. A skilled financial advisor, attorney, or tax professional can prevent avoidable mistakes and oversights.
The Importance of a Generational Wealth Advisor
It’s important to work with experts who have the knowledge and experience to guide you through the process. You will only pass away once, but many of these folks have guided people through the process many times over.
Important steps in intergenerational wealth transfer planning include beginning with assessing your current situation. You need to evaluate and, better yet, document your assets, liabilities, income, and expenses. Next, you should identify your goals. These goals may include providing for your remaining family, minimizing taxes, and ensuring that the assets are used in a way consistent with your values and beliefs.
Obviously, you need to identify your beneficiaries, and this may include not only your family members, but friends and/or charitable organizations as well. Make sure to evaluate all your options and complete the necessary legal steps, which would include creating a will, setting up trusts, and transferring assets through gifts or sales.
Make sure to include the trustees or executors in your planning so that they know how to implement the plan. It can be a great burden to those people you have entrusted to complete your wealth transfer plan. It’s critical that they understand your intentions. Make sure they have no ambiguity – if anything is not 100% clear, take the time to document it to remove any uncertainty. Lastly, review and update the plan as necessary. We suggest updating your plan at least every four to five years unless there are significant changes to tax or estate laws.
Take the Next Steps in Intergenerational Wealth Transfer Planning Today
The significance of this generational wealth transfer warrants careful consideration. Having a carefully prepared wealth transfer strategy will likely mean the difference between success or failure for many in accomplishing their goals. Through discipline and wise advice, your wealth can be an excellent tool in your hands to be a great blessing to you and your family.
Few people are comfortable discussing their own mortality, but the consequences of ignoring it can be immense – the laws surrounding wealth transfers are complex, and the tax implications are severe. You don’t need to navigate it alone. If you would like to talk to one of our wealth management advisors at Halbert Hargrove, contact us here.
Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant.