For many people in younger generations, a wave of wealth is coming.
Called the “Great Wealth Transfer,” today’s Baby Boomers are reaching retirement age and preparing to pass down their assets to Gen X and millennial family members. Over the coming years, it’s estimated that families will transfer around $84.4 trillion in assets. While about $72 trillion will likely go to other family members, the remaining $12.4 trillion is set to go to charity.1
This is a massive transfer of financial power, perhaps one of the biggest in history. Considering it’s expected to impact nearly a third of all Americans, it’s worth taking a moment to discuss the potential significance of this phenomenon and how you may want to prepare.2
The whole idea of the Great Wealth Transfer may still feel fairly vague and foreign—especially if you and/or your family haven’t felt its impact yet. In fact, there are a few misconceptions and key facts we’d like to clarify before forging ahead.
For starters, this isn’t something that’s going to happen overnight.
This massive transfer of wealth has indeed already started—but it’s not ending anytime soon. This is something that will play out for years to come, with the majority of it occurring over the next 20 years. Why? Because the Baby Boomer generation includes those who are currently between the ages of 78 and 60—meaning the youngest boomers haven’t even reached full retirement age yet, while the oldest may be shoring up their estate plans as we speak.
While your family’s circumstances are unique, you likely have some time to prepare—whether you’re on the giving or receiving end of an inheritance (and as we’ll get into more below, preparation is going to be critical to a successful transfer).
Some other considerations include:
People tend to associate the idea of an “inheritance” with a large sum of money—which can certainly be the case for some families. However, wealth transfer doesn’t start and end with cold hard cash. It can include any number of assets, including equities (like stocks and bonds), brokerage accounts, IRAs or 401(k)s, real estate, collectibles, and other valuables—just to name a few. In the grander scheme of things, a wealth transfer can extend to non-tangible items as well, like memories, traditions, cultures, and values.
When we talk about the Great Wealth Transfer, the assumption is often that younger generations (millennials and Gen Xers) will receive large inheritances after their parents and grandparents die. That’s how a traditional inheritance works, after all.
But there’s no rule that says your family can’t choose to approach the wealth transfer process differently. In fact, “giving while living” can provide some pretty big advantages for everyone involved.
First, it enables older loved ones to see the impact of their generosity firsthand—especially if they time their gift to give it greater meaning. Perhaps the recipient is using it as a downpayment on their first house, paying for a wedding, or covering the costs of private school tuition.
And second, it can help those with sizable estates draw down their total net worth over time, potentially minimizing the impact of federal or state estate taxes after death.
Perhaps one of the greatest misconceptions about the Great Wealth Transfer is that the majority of younger Americans will suddenly multiply their net worth overnight. Wealth is not distributed equally across the population, and that inequality will continue to be evident during and beyond this period in time.
In fact, around 42% of the total volume of transfers will come from just 1.5% of all households—meaning a small population of ultra-high net worth families will account for a sizable percentage of the entire wealth transfer.1
Further exemplifying this point, there appears to be a discrepancy between how much younger generations anticipate receiving and how much they’re likely going to get. More than half of recently surveyed millennials said they expected to receive at least $350,000 in inheritance money, while 55% of baby boomers said they planned on passing down less than $250,000 to their youngest family members.3
The takeaway here? Communication and clear expectations are critical.
Why has there been so much chatter in the financial services space about this particular wealth transfer? Well, a few reasons.
For previous generations, pension plans and Social Security benefits may have provided enough (or close to enough) income to comfortably cover a retiree’s financial obligations. Once the recipient died, however, the benefits ended and could (in most cases) not be inherited by the recipient’s heirs.
As pension plans have fallen by the wayside, more people entering or nearing retirement have needed to build up other income sources—401(k)s, IRAs, Roth IRAs, brokerage accounts, annuities, rental properties, and more. Notably, these are transferable assets.
Another important factor? Life expectancy continues to increase. While this can be great news for families, a longer life does lead to higher costs in retirement. Not only do those living in retirement need to be able to cover their daily expenses, but they’ll also need to account for the increased likelihood of medical expenses and long-term care.
Almost 70% of Americans believe that having a longer life expectancy may impact how much of their wealth is able to be passed down to their children and grandchildren.4
Whether you’re in or approaching retirement or on the receiving end of an inheritance, there are a few simple steps you and your family can take to ensure a smoother transition.
One of the biggest mistakes people make during the wealth transfer process is neglecting to communicate with others. As it stands now, around 35% of people say they don’t have plans to discuss their wealth transfer strategy with their family members.4
Don’t assume your heirs understand how to be responsible stewards of their inheritance on their own—nor should you assume how they intend to spend the money or manage the assets. The only way you’ll know what their intentions are is to ask—and provide guidance when possible. Remember, younger family members may not be as financially literate or educated as you are, especially if they haven’t managed a significant amount of wealth in the past.
Communication is also critical if you want the funds to be used for a specific purpose—buying a home, paying down debt, or starting a college fund, for example.
Everyone needs an estate plan, no matter their age or life phase. If you already have one, be sure to review and update it regularly to ensure it still reflects your wishes.
This will include your:
You may find it helpful to work with an estate attorney to complete or update these legally binding documents since a small filing error or other mistake could jeopardize the effectiveness of your entire plan.
Receiving a lump sum of money or assets can be overwhelming (especially if it’s during a period of grief and profound change for your family). If you’re on the receiving end of an inheritance, you may need to take a beat and consider the best way to align that windfall with your financial obligations and long-term goals. Would you like to be able to use that money to replace your income? Support your future retirement? Pay off debt? Different goals may require different steps and considerations.
If you inherit other assets, like real estate or collectibles, it may be even more difficult to determine your next move. You may feel obliged to hold onto certain items for sentimental reasons, or maybe you feel overwhelmed by the responsibilities of being a landlord or caretaker. Again, communicating your thoughts, concerns, and questions with your loved ones ahead of time can help you better prepare for the eventual transfer of wealth (and all the considerations that come with it).
One of the biggest hangups with the wealth transfer process is taxes—knowing who pays them, which assets are subject to tax, and how to minimize the estate and inheritor’s overall tax obligation.
For example, Roth IRAs are funded with after-tax dollars and can create tax-free income in retirement (as long as certain conditions are met). If you inherit a Roth IRA, you may also be able to enjoy the funds tax-free as well. A traditional IRA or 401(k), on the other hand, is funded with pre-tax dollars, and distributions can count toward your taxable income.
While preparing to either receive or distribute wealth, it is recommended and helpful to speak with a tax professional.
Benjamin Franklin summed it up perfectly when he said, “Failing to plan is planning to fail.”
Being prepared for how the Great Wealth Transfer may impact you and your family is critical to making the most of your inheritance (whether you’re the one giving or receiving it). Proactive planning can help you and your family avoid unnecessary tax bills, establish realistic expectations, and develop a sound, goal-based strategy.