The Importance of Intergenerational Wealth Transfer

The Importance of Intergenerational Wealth Transfer

February 20, 2023

Baby Boomers, the generation of people born between 1944 and 1964, are expected to transfer trillions of dollars in wealth to younger generations over the next many years, also known as the “great wealth transfer”. Is your family ready?

Over the next two decades, an enormous amount of wealth is set to change hands as baby boomers pass on their accumulated assets to their adult children in Generation X and millennials. 

In fact, it's estimated that this Great Wealth Transfer could amount to a staggering $68 trillion dollars. But what's driving this historic transfer of wealth? And what will its impact be on the world's economy? To answer these questions, we need to take a step back and examine the factors that have led us to this moment in time.

From the post-World War II economic boom to the rise of the technology industry, several key events have contributed to the accumulation of wealth by the baby boomer generation. And now, as they begin to retire and pass on their assets, we are about to witness a massive shift in the distribution of wealth across generations.

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

What is Intergenerational Wealth?

The first step to understanding Intergenerational wealth is to know what it entails. Intergenerational wealth refers to the transfer of assets, resources, and financial well-being from one generation to the next within a family. It includes all types of assets, such as financial investments, real estate, businesses, and personal property.

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

For the receiving generation, it can provide financial stability, opportunities for education, 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. 

This topic has become an increasingly important issue, especially for those retiring in the not-far-far distance. If you find yourself in this situation, you may be wondering how you can pass your wealth to your children and grandchildren. With deliberate financial planning, the process doesn't have to be overwhelming.

Start The Conversation Early

It's never too early to start planning for intergenerational wealth. Even if your children and grandchildren are young, you can start setting 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 it challenging to adopt an open communication approach. Most families find it uncomfortable to discuss death and the division of wealth, resulting in family financial planning being postponed or ignored. 

Nonetheless, due to the enormity of the task, it is essential to have a clear plan in place. Seeking the help of a trusted financial 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 protects the interests of all parties involved to ensure the effective transfer of wealth within your family, which will have a significant impact on the protection of wealth for future generations.

Understand Your Options

Building intergenerational wealth can provide financial security for your family for generations to come. Seeking the professional guidance of a Financial Fiduciary Advisor is one of the most significant measures you can take to establish a strong wealth transfer strategy. By working with a financial advisor and taking a thoughtful, strategic approach, you can create a plan that aligns with your values and ensures your legacy.

Together, you can investigate your options regarding:

  • Establishing A Trust:. A trust is an additional valuable asset that can protect your wealth and guarantee that it is allocated in accordance with your wishes. You have the option to 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 that determine 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. By taking advantage of these exemptions, you can transfer your wealth while minimizing 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 in value over time. This can help your heirs build their own wealth and provide a lasting legacy.
  • Educating your heirs: It's important to talk to your children and grandchildren about your wealth and your wishes for how it should be used. By educating them about financial planning and responsibility, you can help ensure that they are equipped to handle the wealth you pass on to them.

Pitfalls to Avoid

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

  • Leaving estate planning to your loved onesBeing 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 were to happen 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 on a regular basis – and keeping your advisor up-to-date on any life changes – will help ensure your plan continues to work.

Don't Forget to Plan for Taxes

Taxes can take a significant bite out of your wealth, both at the federal and state levels. There are several different types of taxes that can come into play and affect the value of your estate that's passed on to your heirs.

  • Inheritance tax is a state levy that 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 6 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. The IRS does, however, allow 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 (up from $9,100,000 in 2022). You can give up to those amounts over your lifetime without paying federal income tax. Any amount above is taxed at a hefty 40%. 

There is no estate or inheritance tax in Colorado.

Though taxes are not always completely avoidable, the best wealth transfer strategies work to minimize this tax liability.

Gift and State Tax Exclusions Expire in 2025

The opportunity to make significant and tax-efficient wealth transfer gifts is set to expire at the end of 2025. 

A result of the 2017 Tax Cuts and Jobs Act, the gift and estate tax exclusion as well as the generation-skipping transfer tax exclusion effectively doubled from their 2017 levels – allowing individuals to make generational wealth transfers at a reduced transfer tax cost. Indexed for inflation, the current exclusions allow gifts of more than $12 million before triggering gift, estate, and transfer taxes. Those exclusion levels expire at year-end 2025, when the exclusion level for those taxes will drop to just more than $6 million.

Creating Your Wealth Transfer Plan

An intergenerational wealth transfer plan is an important part of the estate planning process

Agemy Financial Strategies offers professional financial advising services to help individuals and families create and implement a comprehensive financial plan tailored to their unique needs and goals. An elaborate estate plan will account for your current assets and liabilities as well as future cash flows to determine the best method for distributing your assets. 

By working with our trusted Fiduciary advisors, we'll help you create a plan that positively affects all members of your family unit, both young and old, to ensure your loved ones are all better off in the long-term.

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