What is the “Great Transfer of Wealth?”
As baby boomers retire, require long-term care and eventually pass, their collected wealth will be transferred to their children, grandchildren and other beneficiaries. This historic shift in finances has been dubbed by many journalists and financial experts as the “great transfer of wealth.”
Baby boomer’s wealth (born 1946-1964), primarily in the form of home equity and personal investments, is estimated at 30 to 68 trillion dollars. At no other time in history has such a large amount of wealth moved through the hands of generations, as boomers currently hold more wealth than any other generation.
Facing the Coming Financial Literacy Challenge
When discussing the transfer of wealth between generations, an important consideration is whether or not the inheriting generations and beneficiaries are equipped to manage the assets they receive. A 2018 study by TIAA Institute found that only 11% of Millennials had a “relatively high” level of financial literacy, with another 28% displaying a “very low” level of financial literacy. Similarly, many in the Gen X generation struggle with spending and saving habits.
The transfer of wealth is not only about passing on assets but also about passing on knowledge and skills for managing and growing wealth. Financial literacy plays a vital role in helping parents protect and grow their wealth, as well as educating their children on how to do the same for future generations.
With this in mind, let’s consider what steps each generation can take to best manage their financial future.
Strategies for Baby Boomers (born 1946-1964)
It is wise for baby boomers to plan for the strategic transfer of assets later in life, as they are more likely than other generations to have assets remaining after death. Careful estate planning is essential for this generation as they need to choose beneficiaries and make decisions about charitable giving during and after life. Failure to do so could result in higher taxes or other unintended consequences, reducing the impact that baby boomers can make.
At no other time in history has such a large amount of wealth moved through the hands of generations, as boomers currently hold more wealth than any other generation.
One way to transfer wealth is through the giving-while-you’re-living strategy. This approach is not only a way to support your children financially but also a tax-smart way to transfer wealth. For example, in Canada, there is no estate or inheritance taxes, however property and assets left to beneficiaries may be subject to tax. There are also probate fees that vary by province that the estate must pay upon death. To avoid these fees on your final tax bill, many choose to give their wealth away while they’re alive, as Canadians can give an unlimited amount of money as gifts without being taxed. This strategy can also benefit the recipients, as they have access to the wealth earlier and can use it for education, a down payment for a house, or other essential expenses. Additionally, it can provide emotional and psychological benefits for the giver, as they can see the positive impact of their wealth while they are still alive.
Another strategy is to reduce the tax situation of your assets while alive, gift as necessary, enjoy what you have and leave the inheritance tax free via a life insurance policy.
Given the individuality of each situation, it’s a good idea to work with a financial advisor to review current assets, liabilities, income, and expenses and create a clear plan for transferring wealth to future generations. An advisor can also ensure that the plan is structured in the most tax-efficient way and protect beneficiaries from creditors or other financial challenges.
Strategies for Generation X (born 1965-1980)
Generation X is projected to inherit the majority of assets from baby boomers, according to Cerulli, and to become the wealthiest cohort in roughly 25 years. They need to prepare themselves for the potential inheritance by educating themselves on financial literacy and investing in learning about managing and growing wealth. They can also proactively communicate with their parents or other older family members about their financial plans and goals to ensure that their inheritance aligns with their goals.
Ideas on how to communicate include:
- Encourage open and honest communication about financial matters within the family.
- Schedule regular family meetings to discuss financial matters and plans.
- Express financial goals and concerns to parents or older family members.
- Ask for clarification on any financial matters they do not understand or are uncertain about.
Additionally, Generation X can start planning for their own retirement and estate planning to make the most of the assets they inherit and pass them on to their children. They can also consult with a financial advisor to create a comprehensive plan that addresses all aspects of their financial situation, including retirement planning, estate planning, and investment strategies.
Strategies for Millennials (born 1981-1996)
Many millennials will also receive assets during this unprecedented wealth transfer, and the impact is likely significant for them. As the generation with the least assets and associated with reaching working age during difficult economic conditions, millennials may see expanded access to home ownership and some relief from student loan debt. They must be proactive in preparing for this transfer of wealth.
Here are some tips for millennials to consider:
- Start educating themselves on financial literacy and wealth management. This includes learning about budgeting, saving, investing, and retirement planning.
- Communicate with their parents or other older family members about their financial plans and goals. This can help to ensure that their inheritance aligns with their own financial plans and goals.
- Create a comprehensive financial plan that addresses all aspects of their financial situation, including debt management, retirement planning, and investment strategies.
- Consider seeking professional advice from a financial advisor to help them navigate the complexities of the great transfer of wealth.
- Start saving and investing early, even if the inheritance is not guaranteed, this will give them a head start in securing their financial future.
Now is the Time to Prepare
All generations need to be proactive in securing their financial future. Baby boomers should plan for the strategic transfer of assets later in life and work with a financial advisor to review current assets, liabilities, income, and expenses and create a clear plan for transferring wealth to future generations. Generation X and millennials should educate themselves on financial literacy and invest in learning about managing and growing wealth. They should also proactively communicate with their parents or other older family members about their financial plans and goals.
The advisors at Finuity can assist in wealth transition
There are many strategies out there; however, each situation is unique. Whether they involve setting up trusts, charitable giving plans, life insurance or gifting strategies, the key is to communicate openly between the generations and engage your planning team.
At Finuity Wealth, we are well-versed in estate transition planning and work closely with your other professionals (lawyer and accountant) to ensure the strategy implemented fits your desired outcome. We consider all options so that when the plan is decided on, you can focus on enjoying your wealth vs stressing over what will happen to it.
Our wealth transition toolkit is an inexpensive resource and starting point for organizing your affairs. Not only does this kit, help your executor, but it also provides us with plenty of information to identify issues with your current planning. Learn more here.
Have questions or concerns about wealth transition? We invite you to book a strategy session to look at your financial future.
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Disclaimer – This commentary is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on the information provided should consult with his or her advisor.
