So let\’s talk about what many are calling \”The Great Wealth Transfer.\” It has been low-key occurring already but will ramp up in the future.
In light of this, according to the book of Proverbs, \”A good man leaves an inheritance to his children\’s children…\” and \”Houses and riches are an inheritance from fathers…\” Wouldn\’t that mean we have a responsibility to have conversations around wealth transfer and set out a plan to pass on an inheritance to our heirs properly?
According to projections from Cerulli Associates, \”Between now and 2045, multigenerational wealth transfer in the U.S. will total $84.4 trillion, with $72.6 trillion in assets going to heirs and $11.9 trillion donated to charities…\” Now I have seen the asset transfer number estimated for the last few years, and it seems to only balloon further as time goes by. This has much to do with what we\’ve experienced in economic growth through assets surging in value. Still, it\’s essential to keep in mind that this is a crucial topic of discussion that not many are actually discussing, even at the current estimate.
What\’s possibly even more shocking is that \”Households with more than $5 million in investable assets will pay $4.2 trillion in taxes on their estates and transfers to heirs over the next 25 years\”.
What\’s The Most Effective Strategy?
Cerulli further explained that \”family meetings and regular communication (81%) are considered the most effective wealth transfer planning strategy by high-net-worth practices, followed by educational support (59%) and organized succession planning (31%).\”
Shouldn\’t we be discussing this if this much money hangs in the balances for both heirs, charitable organizations, and the government?
The conversation or lack of around wealth, finances, assets, and even debt has changed a lot throughout recent generations. Historically, it was taboo to talk about these aspects of life. But is that the case today? The information age has brought about much more transparency around people\’s finances, from searching salary ranges through sites like GlassDoor to vehicles on sites like CarGurus and knowing what your neighbor paid for their home through websites like Realtor.com. A lot of formerly private information is now more accessible and, in turn, more openly discussed.
Now, the accumulation of wealth is another thing. Unless a tax return were to be released to the general public or the information is shared by the individual, there\’s little transparency around how someone is really doing financially. Are they actually wealthy, or do they just look rich? In some families, wealth may be apparent through their lifestyles, while for others, the wealth may be a surprise due to their more modest lifestyle.
According to the most extensive millionaire study completed to date, this wealth, not surprisingly, held in various assets is not as dispersed as one may think. The Lampo Group found that more than \”79% of millionaires received zero inheritance, meaning only 21% received an inheritance at all. Only 16% of millionaires inherited more than $100,000, and only 3% inherited $1 million or more.\” This means that between 8-9 of every ten millionaires built their wealth without an inheritance. So, if some 80% or more millionaires did not receive any inheritance up to this point, then the $84 trillion transferred is even more eye-opening.
According to International Traveler, \”The majority of transfers (63%) will be passed on from baby boomers – usually defined as people born between 1946 and 1964. Silent generation households – born between 1928 and 1945 – are set to pass on $15.8 Trillion, which will primarily take place over the next decade.\”
It\’s Time To Talk
No matter what generation you are in, it\’s important to establish healthy communication around finances. Since we are in a new year, it may be time to have a family meeting to discuss family wealth plans. Is there documentation around the proper handling of that transfer? Who is designated to carry it out, and so forth? No one wants to have these types of discussions, but better to have what may be an awkward conversation now than to be surprised and not have a plan to transfer wealth and associated taxes.
Changes in Generations Wealth Accumulations
Outside of communication within families, there\’s the whole conversation around where that wealth will go. It\’s no surprise that generational wealth accumulation has changed quite a bit. We had the Greatest Generation and Silent Generation affected by massive economic shifts like the Great Depression, making many reluctant to invest with banks after the 1920s. Then came the Baby Boomer Generation that faced great economic growth post World War II and resulted in great trust in financial advisory firms like Schwab and Northwestern Mutual to manage their assets. However, the behaviors of Gen X, Millennials have not transferred on to Gen Z. This generation is less trusting toward these institutions and more inclined to invest individually through platforms like Robinhood or Webull.
Of course, this is not indicative of every type of individual investor within each generation. Still, it is interesting to look generally at how different ages have handled their investing and resulting wealth generation.
Paul Schatz, president of Heritage Capital, provided an overview of financial advisors stating, \”First, we are in the zone where the most advisers are retiring in history, and second, another group of advisers seem content just to run their books out,\” Schatz said. \”Finally, there are a few who are proactively trying to work with the next generation. It\’s not easy as the younger folks have very different behavioral patterns regarding risk, control, and fees. I try to get clients to open taxable or retirement accounts for their kids. That helps, but some have transferred their money to friends and advisers closer to their homes.\”
So whether you will be a recipient of this great wealth transfer or not, consider what conversations you may need to have in managing your wealth accumulation and how you envision it being passed onto future generations.
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