Preparing For The Great Wealth Transfer

Preparing For The Great Wealth Transfer

February 19, 2024

The great wealth transfer, or intergenerational wealth transfer, is the transmission of family assets from generation to generation. Baby Boomers are on the verge of transferring trillions of dollars in wealth to younger generations in the coming years, signifying a notable shift in financial dynamics. Is your family ready to navigate and benefit from this historic transfer of wealth?

Over the next two decades, a massive amount of wealth is set to fall into the hands of Generation X and Millennials. The great wealth transfer recipients are estimated to inherit $84 trillion in assets by 2045, with $72.6 trillion going directly to heirs and $11.9 trillion to charity. 

So, what can we expect as this wealth transfer takes place? And how can we best prepare for the changes to come? Today, we'll explore the answers to these questions and more as we explore the impact of intergenerational wealth transfer on our society and economy.

How Intergenerational Wealth Was Born

This new era of intergenerational wealth began unfolding in the mid-2010s, coinciding with the Baby Boomer generation's retirement. Born into unprecedented prosperity following World War II, Boomers entered the workforce during an economic boom in history, helping them amass wealth through investments in real estate and the stock market.

Between 1983 and 2023, the value of homes soared by 500%, with stock market gains even more impressive. Americans have roughly $156 trillion in assets, but half of that wealth — $78.1 trillion — belongs to the baby boomers. The rest is spread across Generation X, the Silent Generation, and Millennials. Understanding how intergenerational wealth works is important as it is key in protecting assets that will one day be passed down to you. 

How Intergenerational Wealth Works

Intergenerational wealth can be passed down through inheritance, gifting, or other means, and it is accumulated over time through a combination of hard work, wise investments, and other factors. The transfer of intergenerational wealth can significantly impact both the receiving and giving generations. 

For the receiving generation, it can provide financial stability, educational opportunities, and the ability to pursue personal goals and passions. For the giving generation, it can offer a secure feeling of passing on a legacy and helping their loved ones achieve their dreams. With deliberate financial planning, the process doesn't have to be overwhelming.

Starting The Conversation Early

This topic has become an increasingly important issue, especially for those nearing retirement. If you find yourself in this situation, you may wonder how to pass your wealth to your children and grandchildren. Even if your children and grandchildren are young, you can set aside money in a trust or savings account for their future. 

This can help you maximize the power of compound interest and grow your wealth over time. However, dealing with multiple assets across generations can sometimes make adopting an open communication approach challenging. 

Nonetheless, due to the size of the task, it is essential to have a clear plan in place. Seeking the help of a trusted fiduciary advisor can be particularly useful in sensitive family circumstances as they can offer unbiased advice. It is crucial to establish a solid financial plan that helps protect the interests of all parties involved. This can help secure the transfer of wealth within your family and protect the wealth for future generations.

Understanding Your Options

Seeking the professional guidance of a fiduciary advisor is one of the most significant measures you can take to establish a successful wealth transfer strategy. By working with a fiduciary and taking a thoughtful, strategic approach, you can create a plan that aligns with your values and helps protect your legacy. Together, you can investigate your options regarding:

  • Establishing a Trust: A trust is an additional valuable asset that can help protect your wealth and guarantee it is allocated to your wishes. You can set up a trust that pays out income to your heirs for a specified time or until they attain a specific age. You can also include provisions determining how the funds are utilized, such as education or medical expenses.
  • Using gift tax exemptions: You can give up to a certain amount of money each year to your children and grandchildren without incurring gift taxes. Taking advantage of these exemptions allows you to transfer your wealth while helping minimize your tax liability (more on this below).
  • Thinking beyond cash: While cash gifts are certainly appreciated, there are other ways to transfer wealth. You can gift stocks, real estate, or other assets that have the potential to appreciate over time. This can help your heirs build their wealth and help provide a lasting legacy.
  • Educating your heirs: It's important to talk to your children and grandchildren about your wealth and your wishes for using it. By educating them about financial planning and responsibility, you can help ensure they are equipped to handle the wealth you pass on to them.

Avoiding Common Mistakes

When figuring out the best way to pass along assets to the next generation, there are certain mistakes you should avoid. A few to watch out for include:

  • Leaving estate planning to your loved ones: Being intentional with your estate planning is a gift to your loved ones. Doing so not only benefits them, but it can also provide a great deal of peace for you, too.
  • Transferring the entirety to one individual: Being left with large amounts of wealth can be daunting, leaving beneficiaries feeling overwhelmed and unable to meet expectations. Plus, if something happened to that beneficiary, the rest of the family could be left scrambling on where to turn. 
  • Not reviewing your plan: Up until the day you pass away, estate plans can be legally changed if the changes are done so without coercion and under the right frame of mind. Reviewing your plan regularly – and keeping your advisor up-to-date on any life changes – will help ensure your plan continues to work.

Don't Forget About Taxes

Taxes can take a significant bite out of your wealth at the federal and state levels. Several types of taxes can come into play and affect the value of your estate passed on to your heirs.

  • Inheritance tax is a state levy Americans pay when they inherit an asset from someone who’s died and is deemed a tax on your right to transfer property at your death. Only six states currently have inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
  • Gift tax applies to financial gifts made from you to someone else. As the gift giver, you're responsible for paying the gift tax. However, the IRS allows you to make gifts up to an annual exclusion limit before the gift tax applies.
  • The federal estate tax is a tax that's levied on the transfer of property when someone passes away. At the upper range, the federal estate tax can reach 40%. A taxable estate includes all of the decedent's property minus any allowed costs, losses, exclusions, or deductions.

Whether you pay estate tax might come down to the state you live in. If you reside in Connecticut, the estate tax exemption for 2023 is $12,920,000 per individual. You can repay those amounts over your lifetime without paying federal income tax. Any amount above is taxed at 12%.

There is no estate or inheritance tax in Colorado. Though taxes are not always completely avoidable, the best wealth transfer strategies work to help minimize this tax liability.

Creating Your Wealth Transfer Plan

An intergenerational wealth transfer plan is an important part of the estate planning process. Agemy Financial Strategies offers experienced financial advising services to help individuals and families create and implement financial plans tailored to their unique needs and goals.

Our trusted financial advisors will help you create a plan that positively impacts all family members to help ensure your loved ones are better off in the long term.

Contact us today to learn more and schedule your complimentary consultation.