According to a recent study compiled by Cerulli Associates, roughly 45 million households in the U.S. will transfer $68 trillion over the next 25 years, making Generation X the primary beneficiary. To address this, I like to think about this in two separate phases that we work through with clients to prepare for an efficient generational wealth transfer.
Phase 1: Planning and educating
As Warren Buffet once said, leave your children “just enough so that they would feel that they could do anything, but not so much that they would feel like doing nothing.” Before implementing your wealth transfer plans, one of the first and most important steps to take is to plan and educate your children in financial stewardship. Doing so is critically important and ensures that they are motivated to carry on as capable, contributing members of society post-wealth transfer.
It is predicted that family assets are lost 70% of the time that wealth is transferred from one generation to the next. This can happen due to many reasons; for example, parents may not be comfortable speaking openly about money, or they fear the next generation may become entitled and lack motivation once they know about their family’s cushion of wealth, or even lack of knowledge around the value of money and how to handle it within the family. When indoctrinating your children to what financial stewardship means, it is important to first, make it abundantly clear that you are discussing your wealth; and not their own. Doing so will avoid the unfortunate but high likelihood of failure and self-destruction that many families fall victim to post-wealth transfer. You needn’t start with specifics as to how much, how its held or where it is invested. No different than when teaching a baby to walk, you don’t start by explaining how to run a marathon. Likewise, you don’t need to get into the intricacies and specifics on your wealth, rather, focus on your values including stewardship, philanthropy, and the importance of being a productive member of society.
The above issue further highlights the importance of open and honest conversations, which will prompt your family to face the realities of a wealth transfer head-on as you become a financial resource for your kids. Educating and including children and beneficiaries in important financial planning conversations is critical to get everyone on the same page about the family’s financial situation, expectations, and values. Having intentional conversations about legacy planning can help the next generation understand your wishes and family values, which in turn allows your children to manage assets responsibly post-transfer.
Phase 2: Options for creating a legacy
Once everyone is on the same page about the goals and wishes for the family’s wealth, there are several things to think about when creating a legacy plan for that wealth transfer. One is to start gifting during your lifetime. This strategy can be helpful to pass assets tax-free annually.
As we approach 2022, the IRS has announced that the annual gift tax exclusion has increased to $16,000 which can be gifted tax-free to any recipient, per year, without triggering any estate or gift tax consequences. For a married couple, you and your spouse can elect to give up to a combined $32,000 a year to whomever you’d like without having to file a gift tax return. Additionally, each $16,000 that you and your spouse give away during your lifetime reduces your estate for federal estate tax purposes, and to the extent those assets are preserved and grow, that growth occurs outside of your taxable estate. As parents, deciding to give children the maximum amount each year can be a simple and efficient way to transfer wealth to the future generations while also potentially reducing estate tax exposure.
Next, you may want to take a step back and weigh your options for the inheritance of the estate subsequent to your passing. Doing so can mitigate the impact of estate taxes and identify legacy goals and objectives that you may have for your family. If a top priority for your family is maximizing the amount of wealth transferred to the next generation, consider taking advantage of the tax-efficient techniques available to you. In 2022, individuals will be able to transfer a total of $12.06 million at death or during their lifetime free from federal gift and estate taxes. This is a notable increase from the current $11.7 million in 2021, allowing married couples to transfer a total of $24.12 million free from federal gift and estate taxes in 2022.
A final option to consider is taking advantage of ways to cover expenses for family members, like implementing a 529 education savings plan for your children or grandchildren. A 529 plan is an investment account that offers tax benefits to pay for qualifying educational expenses for a beneficiary of your choice. You can use a 529 plan to cover various educational expenses — even student loan repayments. Additionally, another route to consider for your family may be to pay tuition directly to the school to cover education expenses, as is not considered a gift (do realize that this may substantially reduce eligibility for financial aid benefits). Even if you have fully funded a 529 education savings plan account for a child or grandchild, depending on your desire to further transfer wealth, paying tuition directly to an educational organization may be a worthwhile option to explore, allowing the 529 plan to continue growing tax-free and can be left for graduate school expenses or even possibly, great-grandchildren. If this is the better option for your family’s assets, the 529 plan can be left for great-grandchildren or graduate school expenses.
Crewe Advisors works with families to develop their long-term financial planning goals and objectives including establishing a narrative and a strategy to design a path for multi-generational wealth management. As baby boomers continue to retire, generational wealth transfer planning is a critical component of many families’ financial plans. This shift is a force reshaping the wealth management agenda and is expected to further unfold over the coming decades. We believe a relationship that works for both sides is most important, and one of our main objectives is to help clients get organized, helping them align their wealth with their lives so that they can make the right decisions that works best for them. Get in touch to start a conversation today.