Great Wealth Transfer

The great wealth transfer refers to the transfer of an estimated wealth of $84 trillion that will be passed on from baby boomers to Generation X, Y, and charities. If managed properly, it can help Americans increase their wealth while ensuring their financial safety and impact many aspects of American life.

It will affect only 10% of the wealthiest and may even result in wealth inequality. It may occur in the next many decades or longer. But the wealth transferred does not represent income, as younger generations inheriting it might have to transform it into sustainable income.

The great wealth transfer represents the unseen, unexpected volume of wealth transfer at staggering value from the baby boomer generation to Gen X, Gen Y, heirs and charities. The wealth is passed down to the rightful heirs and charities through trusts, gifts, inheritances, and equities. It is facilitated through professional estate management and financial planning strategies. As a result, it entails a lot of asset redistribution throughout generations and charities in significant proportion. 

Such a huge wealth transfer volume implies reshaping economic power, impacting charitable alms and influencing the investment pattern. It leads to the opening of venues for financial planners to resolve the urgent needs of young inheritors centered on personalized education, financial planning and digital engagements. 

It has the potential to impact the financial sector in the future. Since the younger generation has a different take on investment and wealth, millennials could take different investment courses, affecting the markets. Their investment activities would also steer changes in consumer behavior, the housing sector and luxury purchases. Thus, they would also promote investment in technology and sustainable projects.

Let us use a few examples to understand the topic.

Example #1 

An online article published on 12 July discusses the event of the greatest wealth transfer, stressing that partners and spouses would receive almost $9 trillion from it. It would benefit the female counterparts as they have higher life expectancy than males. Moreover, throughout the next 20 to 30 years many younger generation individuals would inherit $84 trillion in wealth. As per the global report of UBS, it has been termed as the horizontal transfer of wealth reshaping luxury spending and wealth management.

Such a huge transfer of wealth concerning male dominant sector could take place beyond $50 trillion wealth in transference. Moreover, as the decade reaches 2030, most of the baby boomers' wealth is expected to be controlled by women. It will happen along with rising investible assets and incomes of females, affecting luxury markets and philanthropy.

Example #2

Let us assume that a rich couple, Melinda and Bill Doors, have amassed a staggering wealth of $50 million from their processed food business in Old York City. They are aged 78 & 76, respectively, so they feel their business life has ended, and needing the wealth transfer to their heirs. So, they create a plan to transfer all their wealth to their two children and grandchildren. 

They create trusts to transfer $20 million to each child and set aside $5 million each to their grandchildren by creating generation-skipping trusts. Moreover, they also indulge in proactive estate planning and take advantage of the $13.61 million individual exemption. As a result, the Doors couple minimized their estate taxes ensuring that their wealth gets transferred to with full benefits to their heirs without any tax obligations.

The phenomenon of the transfer of wealth has the potential to benefit the below:

• According to the great wealth transfer news, millennials will inherit a major portion of the $84 trillion wealth of baby boomers.
• Gen X would also receive huge wealth from passing on to their parents.
• Women are set to be the greatest beneficiaries of the wealth transfer due to their increased involvement in wealth management and long lifespans.
• Gen Z will leverage it at the beginning of their career and consolidate their wealth above their inherited assets.
• Charities will also derive a lot of wealth from the great transfer.

One can prepare for it in the following manner:

• Ensuring that one's values are in line with the objective of the next-gen.
• Reassess business processes, communication channels, human resources, and engagement channels.
• Developing extensive plans regarding transferring and managing wealth to millennials.
• Conduct family meetings to update and maintain intergenerational continuity plans.
• Involve spouses in all financial meetings and strategies to build trust and retain long-term relationships.
• Provision of customized financial literacy and education to create trust and financial soundness
• Execute strategies to reduce tax obligations pertaining to charities and heirs.
• Deploy various technological tools and technologies to increase service delivery and engagement concerning heirs, charities and millennials.

Let us discuss the taxation pertaining to the huge wealth transfer:

• Estate taxes would come into play during the great wealth transfer of assets upon death, with existing exemption limits for individuals to pass on wealth to $27.2 million for couples and $13.61 million without paying any federal estate taxes.
• Gift taxes do not come into action until the limit of exemption is breached allowing the grantor to transfer wealth tax-efficiently.
• Generation-skipping transfer tax has to be paid by the inheritor when the wealth transfer happens, skipping a generation, like from grandfather to grandchildren.
• Any unpredictable new tax policy or changes in existing policies may adversely affect tax levies on wealth transfer. 

However, many strategies like charity, family limited partnership and irrevocable trusts can still reduce tax obligations during wealth transfer, as mentioned by Ray Dalio on great wealth transfer. Hence, it leads to wealth preservation across the next batch of inheritors. 

It will transform the market as follows:

• It will create new market opportunities as $84 trillion of assets flow to heirs.
• Younger successors may invest their wealth differently.
• The majority of Gen Z investors believe that only bonds and stocks can help them build more wealth and provide higher-than-average returns.
• Gen X, millennials and Gen Z have a liking for direct company investments, private equity, and private debt.
• Most of the younger investors support impactful and sustainable investing whose trend has seen a surge in recent times.
• These generations of new wealthy people will still make real estate as their main investment.
• The transfer of wealth would enable increased homeownership amongst the younger generation.