The Great Wealth Transfer

The Great Wealth Transfer

July 15, 2021
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The Largest Transfer of Wealth in US History

Right now, a massive generational transfer of wealth is underway. By the time you finish reading this article, another 70 Americans will have just turned 65. Although estimates vary, most experts presume that the amount of wealth to be transferred will start at $15 trillion. One thing’s for certain—this shift in wealth will have an enormous impact.1

Baby boomers (those born between 1946 and 1964) have done quite well for themselves. For the first time in US history, a generational group has lived better, more prosperous lives than their children. Many estimates show that baby boomers hold approximately 57% of all the wealth and assets in the US economy. By contrast, their children (typically categorized as Generation X and millennials) own roughly 3%.2

Historically speaking, that’s pretty amazing. One way to understand this phenomenon is by looking to the past. By 1990, baby boomers had accumulated about 21% of the nation’s wealth. Never before or since has so much of America’s wealth been in the hands of a single generation. This extraordinary amount of wealth continued to grow until it reached the trillions—trillions that are poised to be transferred in the coming years.3

Prime Beneficiaries

Although some believe that Generation X (those born between 1965 and 1980) stands to inherit a large amount of this transfer, the majority of it will still go to millennials (those born between 1981 and 1996), as Generation X has already begun inheriting wealth from their parents or family. It’s important to note that the financial data for those born between 1965 and 1980 can sometimes be misleading or sparse. Several reasons for this have been suggested, but some researchers believe that it stems from Generation X’s resistance to being categorized. Others point to the financial industry consistently overlooking these key consumers in the wealth space. However, considering that by 2028, Gen X will overtake their parents’ generation from a population standpoint of 64.4 million versus 63.7 million projected baby boomers, it’s almost certain that future research will further clarify the generational landscape.4

Much has been written about the financial habits of the millennial generation, but in truth most millennials are practicing positive financial behaviors such as budgeting, saving, decreasing their debt, and investing. Consider this: for millennials who are saving, it’s not just nickels and dimes. Almost a quarter of millennials who save have $100,000 or more put away, with three-quarters also saving for retirement and one-third saving to buy homes.5

Saving Despite Debt

The fact is that millennials have come of age and are more responsible with their money than ever. However, massive debt has also shaped this group’s approach to their finances. More than three-quarters of millennials have revolving or unsecured debt of some kind, including student loans, credit card debt, auto loans, personal loans, or medical debt.

As a result, roughly 75% of millennials feel insecure about their current and future financial stability. This insecurity is especially felt among millennial parents, as the majority have experienced firsthand the additional expense of raising a family.

However, for those concerned about how their legacy will be used, there’s great news. Despite these challenges, millennials are practicing positive money habits and pursuing financial goals such as boosting their credit scores and putting more away for retirement. These behaviors seem to point to a strengthened desire to be fiscally responsible. Based on a recent survey, a majority of people aged 25 to 40 said they would use increased wealth to do the following:

  • Fund down payments on homes rather than have big weddings
  • Buy smaller, more affordable homes with smaller mortgages rather than larger, more expensive homes with more debt
  • Opt for minimalist lifestyles in order to save for the future rather than living extravagantly now
  • Cut back on dining out, cable and streaming services, gym memberships, and vacations in order to reduce debt6

How to Prepare

When thinking about transferring or receiving wealth, you need to remember that financial knowledge is crucial for avoiding potentially critical mistakes. There are some areas that inheritors or those preparing an estate transfer should be aware of.

One of the first questions that baby boomers, Generation X, and millennials should ask is whether the inheritance will result in an income tax. The simple answer is no. While federal estate taxes, state-level estate taxes, or inheritance taxes may apply to estates that exceed certain thresholds—for example, in 2021, the federal estate tax exemption amount is $11.7 million for an individual—receipt of an inheritance does not result in taxable income for federal or state income tax purposes.7

Keep in mind that this article is for informational purposes only and is not a replacement for real-life advice, so make sure to consult your tax, legal, and accounting professionals as you prepare or update your inheritance strategy.

To make well-informed decisions and handle an inheritance prudently, you need to understand the type of assets you’re giving or receiving.

In general, you can think of inherited assets in six general categories:

  • Cash and Securities
  • Retirement Accounts
  • Real Estate
  • Art and Collectibles
  • Life Insurance and Annuities8
  • Interests in Trust

A clear financial strategy is essential for leveraging an inheritance in a way that can help the inheritor pursue their goals. This is a situation in which a financial professional is not only helpful but possibly essential. Along with the many investment vehicles at their disposal, a financial professional can be a valuable sounding board for all your financial questions. Their guidance during the transfer of wealth can be an invaluable resource.

Will You Be Ready?

After the events of 2020, many generational investors are more anxious than ever about the future. The best thing families can do right now is to communicate openly and honestly about their estate and inheritance goals. Involving a financial professional early can show you investment strategies that you may not have normally considered.

1. Thehealthcareinsights.com, 2020
2. Smartasset.com, December 9, 2019
3. Finance.yahoo.com, March 13, 2020
4. Forbes.com, January 23, 2019
5. About.bankofamerica.com. 2020
6. About.bankofamerica.com. 2020
7. Fiduciarytrust.com, January 15, 2021
8. The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contact. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59 ½, a 10% federal income tax penalty may apply (unless an exception applies).

Several factors affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder may also pay surrender charges and have income tax implications. You should consider determining whether you’re insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy depend on the ability of the issuing insurance company to continue making claim payments.

Art and collectables can be affected by a variety of developments, such as appraisals and liquidity. There’s no guarantee that art and other collectables will maintain their value in the future. Art, collectables, and other speculative investments are not appropriate for every investor.

Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who’s familiar with the rules and regulations.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

The forecasts or forward-looking statements are based on assumptions, subject to revision without notice, and may not materialize.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite, LLC, is not affiliated with the named representative, broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.

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