The Impact of Generational Wealth Transfer


Stephen Forlani, JD, Vice President, Financial Planning

As the baby boomer generation ages into and out of retirement, the “Great Wealth Transfer” has become a hot button topic in the world of finance and economics. Baby boomers, or those born between 1946 to 1964, are estimated to hold about half the nation’s household wealth and are expected to hand down the vast majority of that wealth to their primarily millennial children over the next two decades. This transfer will represent a significant change in circumstance for many in that millennial cohort, a group that has been troubled by two recessions, burdensome student debt and increasingly unaffordable home prices. What steps should be taken to prepare the next generation for such an adjustment?

Keep it in perspective

Though the sum total expected to be handed down is undeniably vast, many experts are skeptical about how much accumulated wealth will actually be inherited by the younger generations. The transfer has already begun in some cases through the use of inter vivos gifting, as retirees make gifts to their children while they are still living. High-net-worth individuals can make use of the annual gifting exclusion to avoid estate and gift tax on such gifts, while most others can give freely during life without jeopardizing their lifetime exemption from estate taxes. However, many baby boomers are entering retirement with debt of their own while facing longer life expectancy and the associated health care costs that come with it. Growing talk of an impending crisis of Medicare and Social Security can only exacerbate concerns over giving away too much.

Inheritors must also consider the tax ramifications associated with an inheritance. An obvious example is a child inheriting an IRA from a parent. The SECURE Act eliminated the stretch IRA option for most child inheritors, instead requiring that the entire account value be liquidated within 10 years following the death of the decedent. Withdrawals are treated as ordinary income to the IRA beneficiary in the year of withdrawal. Children inheriting an IRA from a parent are frequently at or near the peak of their earning capacity and therefore subject to taxation in the highest brackets during this 10-year liquidation period. The problem is worsened if the account being passed down has accumulated a particularly large tax-deferred balance. The after-tax value of an inherited IRA may therefore be quite a bit less than what it appears. In light of this, advisers should consider several action items when helping potential inheritors plan for their financial futures.

Encourage the asking of questions and better financial education

There is perhaps no better advice for families seeking to plan for wealth transfer than to establish clear and open lines of communication. Assets may be inherited in a variety of ways, whether via will, trust distribution, beneficiary designation or other. The questions of asset titling and how assets will pass down are of particular importance. Inheritors should be encouraged to ask questions and better educate themselves on these topics.

Furthermore, each situation is unique and requires its own special evaluation of the circumstances involved. The trust beneficiary of a large estate may need education on how and when they will receive distributions, how trust principal will be invested or how the trust will evolve over time. A beneficiary inheriting an IRA from a parent will need to devise a plan for distributing the money within the 10-year liquidation period in the most tax-efficient manner possible. Open discussion can lead to greater implementation of wealth preservation strategies, including annual lifetime gifting, income tax planning or estate tax planning through the use of irrevocable trusts or life insurance. The more an inheritor knows about what to expect, the better they can incorporate that expectation into their own financial planning.
Develop a plan and help to establish good financial habits

Arguably the most important thing for the next generation is to have a financial plan of their own, develop good habits as it relates to saving and spending and to understand how a future inheritance might impact their own planning. Take the example of those millennials who have been burdened by inconsistent market performance, student debt and rising costs. Advisers should help structure a plan for how to prioritize efficient savings and pay off high-interest debt, in the context of trying to allow for aspirational goals such as travel. In most cases, relying on a future inheritance is a dangerous concept in financial planning, and proper counsel from the adviser should steer a potential inheritor toward the best use of such a windfall, if it does come into play.

Put it into practice

The wealth planning team at Ancora works with clients and their children to develop holistic financial plans designed to optimize wealth transfer strategies. We strive to put an emphasis on educating the next generation about efficient transfer of assets, and our big-picture approach brings the full estate plan into focus. Direct access to resources such as our in-house life insurance team provides us with the ability to make what we believe to be the best strategic recommendations for each individual household. Please reach out to your Ancora team to discuss financial planning or preparing for a wealth transfer scenario.

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