What Is the Great Wealth Transfer?
Baby boomers have amassed more wealth than any generation before them. Over the next two decades, they will be passing this wealth to younger generations. Estimates are that between $30 to $68 trillion will be transferred from Boomers (1946-1964) to Generation X (1965-1980) and Millennials (1981-1996).
To put this in perspective, US GDP was around $22 trillion in 2021.
Women currently control a third of total US household financial assets – more than $10 trillion.
Research from McKinsey found that in the United States, more than two-thirds of wealth will be held by women by 2030, much of which to expected to come from inheritance.
While acquiring wealth though inheritance seems fairly straightforward, there are a number of considerations and strategies that need to be addressed to ensure that the wishes of the grantor are accomplished and that beneficiaries are prepared for the windfall.
Communication is Key
Talking about money is often seen as awkward and it is very common for parents and grandparents to keep their net worth to themselves, but it is actually responsible for making plans together.
Some questions might be:
- Do you want to use it today?
- Are there people or organizations who would benefit right now from a gift or donation?
- Do you want to leave it to be distributed after your death? This is when one should begin thinking about the different estate planning instructions and tax consequences involved in leaving assets to beneficiaries.
- What issues should I consider if you experience a sudden wealth event?
What Do You Need to Consider from an Estate Planning Perspective?
Establishing or updating an estate plan requires you to answer several questions including:
- Whether you need a will-based or trust-based plan
- Who should you nominate to make important decisions on your behalf, and fill the roles of trustee, executor, attorney-in-fact, and health care agent?
- What type of structure is best for you and your family upon your death and/or the death of your spouse?
- And in general, what issues should you consider before updating my estate plan?
These types of questions, along with the gift and estate tax considerations of estate planning, can make the process feel overwhelming at times. You can make things more manageable by thinking through these main issues:
- Who will make decisions on your behalf?
- If you are married, what happens when you or your spouse dies? If you are not married, what happens when you die
- If you are married, what happens at the death of the previously surviving spouse?
- Are you eligible for Social Security as a surviving spouse?
- Can you delay distributions from an IRA you inherited?
- Will people you make a gift to receive a step-up in basis for the gifted property?
What Do You Need to Consider from a Tax Perspective?
The current estate and gift tax exemption is very generous – in 2022, it was over $12 million per person and $24 million per married couple. That means you can have an estate value at your passing, or make lifetime gifts, or a combination of lifetime gifts and estate value, up to those amounts and not owe any gift or estate tax.
For this reason, most planning tends to focus on:
- Minimizing capital gains tax on assets to be passed to heirs or charities
- Maximizing the tax value of charitable donations
- Making lifetime gifts that do not require the filing of a gift tax return
Strategies could ivolve one or more of the following:
- Taking full advantage of the step-up in basis on owner’s passing and double step-up in community property states
- Making gifts of appreciated property to older (upstream) and younger (downstream) generations to exploit tax rate differentials
- Transferring appreciated securities or property to a Charitable Remainder Trust (CRT)
- Consolidating charitable donations to exceed the standard deduction
- Timing charitable donations using a Donor Advised Fund to match deductions to years when your marginal tax rate is highest
- Making direct payments of college tuition and medical expenses
- Accelerating funding of a 529 college plan
For estates valued at or above the Unified Estate and Gift Tax amounts, there are several strategies aimed specifically at minimizing the impact of the estate tax.
There are many paths to navigate when it comes to tax implications and transferring gifting assets. Contact a BakerAvenue expert to discuss your specific situation.