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The looming wealth transfer from Baby Boomers and the Silent Generation to younger generations is set to reshape the financial landscape in unprecedented ways. Estimated at $84 trillion1, this transition is a huge financial event. As younger generations prepare to inherit this wealth, understanding and planning for this wealth transfer is an integral part of sound financial planning.
There are several initiatives which a financial advisor and their client can implement to ensure the most effective transfer of inherited wealth. Following is an outline of these tools to best benefit your client:
Wills and trusts: Having a clear will in place is essential for a smooth wealth transfer. Trusts are another valuable tool that can help manage and protect assets for future generations, safeguarding wealth from unnecessary legal battles or mismanagement.
Beneficiary designations: Encourage your clients to regularly update beneficiary designations on retirement accounts, life insurance policies and other financial assets. This is important in preventing conflicts and ensuring assets are distributed to the right individuals.
Power of attorney: A well-thought-out estate plan should include provisions for incapacity. Appointing a trusted individual to make financial and healthcare decisions if a client becomes incapacitated can prevent family disputes and ensure decisions will align with the individual’s values.
Tax implications of wealth transfer: Tax implications, if not managed correctly, can diminish the value of an estate significantly. This includes:
- Estate taxes: Federal and state estate taxes can take a sizable portion of inherited wealth. With proactive tax planning, including taking advantage of exemption limits, these taxes can be minimized.
- Gift taxes: Educating clients on the annual gift tax exclusion and lifetime gift tax exemption limits is essential for minimizing their tax burden while allowing them to transfer wealth during their lifetime.
- Income taxes: Understanding how to structure retirement accounts which are inherited to minimize income taxes is also essential to estate planning.
Communication and education: One of the best ways to prepare heirs for their financial responsibilities is through open communication and financial education. As an advisor, you can facilitate family meetings to discuss the estate plan and the reasoning behind it. These discussions are key in preventing future conflicts and helping heirs feel prepared for their roles. It is helpful to provide heirs with financial education resources, such as workshops or one-on-one consultations, which helps them make informed decisions about managing their inheritance.
Asset protection: This section addresses protecting assets from potential threats like lawsuits, creditors and market risks. Strategies include:
- Trust structures: Irrevocable trusts and other legal structures can shield assets from creditors while ensuring they remain available for future generations.
- Insurance: Life insurance and liability insurance can provide an extra layer of protection against unforeseen events.
- Investment strategies: Creating a balance between growth and risk management through investment strategies can help to ensure wealth continues to grow while remaining protected from market volatility.
Philanthropy and legacy planning: Philanthropy plays an important role in wealth transfer for many high-net-worth families. Incorporating charitable giving into estate planning offers tax benefits as well as a sense of purpose for heirs. These include:
- Charitable trusts and donor-advised funds: This allows families to continue their philanthropic efforts even after the original benefactors have passed, enabling the heirs to remain connected to their family’s values and mission.
- Family foundations: The establishment of a family foundation provides an opportunity for a lasting legacy by having the heirs actively participate in managing charitable donations.
- Legacy projects: Your clients may have specific projects or initiatives they want to leave behind that reflect their values.
A new generation may also have a different investment focus. Gen Z and Millennials tend to prioritize sustainable and impact investing, a trend that advisors must be prepared to support. Digital assets like cryptocurrencies are also becoming a significant part of estate planning. Advisors need to help clients ensure secure access to these assets for their heirs as well as navigate the evolving legal landscape surrounding the inheritance of digital wealth. Additionally, technology is revolutionizing estate planning, with digital tools making it easier for families to manage their estates online. As such, cybersecurity measures are essential to protect these digital plans.
As a financial advisor, you play a critical role in helping families navigate wealth transfer. This requires staying informed on the latest legislative developments and best practices for the evaluation of risk in investments, and communicating your knowledge with clients. With ongoing discussions , you can help ensure that their wealth is preserved, grown and passed on in alignment with their values and goals across generations.
1 https://www.ml.com/articles/great-wealth-transfer-impact.html
Colleen Kelleher Sorrentino, CFA® is with Kelleher Financial Advisors, a New York-based investment advisor. Stacey Mankoff is with The Mankoff Company LLC, a New York-based marketing firm serving the financial industry.
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