The Great Wealth Transfer: What it means for your money

The biggest wave of wealth in history is about to pass from Baby Boomers over the next 20 years, and it’s going to have major impacts on many facets of life. Called The Great Wealth Transfer, $84 trillion is poised to move from older Americans to Gen X and millennials. If it’s managed smartly, Americans will be able to grow their wealth and ensure their financial security.

“Preparing for the Great Wealth Transfer requires careful planning and strategic decision-making for individuals on both sides of the equation – inheritors and those leaving the assets behind,” says Nicholas Yeomans, CFP, president of Yeomans Consulting Group in the Atlanta area.

Here’s how the Great Wealth Transfer may shake up your finances and how you can prosper.

How big is the Great Wealth Transfer and what can you expect?

The Great Wealth Transfer is poised to begin, with the baby boomers – who own about half the country’s wealth – passing on $84 trillion through 2045. Experts project that younger generations such as Gen X and millennials will inherit $72 trillion of that total, while charities receive the rest. It’s been called the largest transfer of wealth in history – it’s poised to make millionaires of many.

Of course, the Great Wealth Transfer will take decades to play out. While the oldest boomers (born 1946 – 1964) are 78 this year, the youngest are turning 60, not even able to claim Social Security yet. Therefore, this transfer won’t play out all that quickly – giving many Americans plenty of time to prepare their finances so that they thrive in the future. But it’s not too early for Gen X (born 1965 – 1980) and millennials (1981 – 1996) to begin planning for this massive financial shift.

The majority of the wealth will be transferred among the wealthiest 10 percent, according to the New York Times. The top 1 percent wealthiest control as much as the bottom 90 percent of the country as a whole, while the bottom 50 percent direct about 8 percent of the wealth. So, issues of wealth inequality are likely to continue as the Great Wealth Transfer plays out.

But while wealth is good, it’s not income. And even if younger generations receive an inheritance, they may need to turn it into income that can sustain them over time, perhaps through dividend stocks or annuities. Others may inherit real estate that can be used to generate income or else house them and eliminate what’s likely the single largest expense for most people.

It’s vital that Americans think about how to manage their estates so that their money goes where they want and so that they can minimize costs for their heirs and set them up for success.

How Americans can prepare for the Great Wealth Transfer

Regardless of how much wealth you’re working with, you need an estate plan, say experts. The estate plan must have a will and may have a trust, if you’re working with somewhat more assets. But even one of the simplest ways to make sure that your assets go where you want is to name a beneficiary on your financial accounts, sidestepping the hassles of probate court.

If you’re using a trust, it’s important that your assets are registered in the trust properly if you want them to enjoy the trust’s protection. Whereas accounts that have named beneficiaries supersede the trust’s instructions, you’ll need to make a complete inventory of all other accounts and ensure that they’re properly registered as part of the trust structure.

Beyond that, it’s important to communicate the plan to potential heirs so everyone is informed.

“Proactively communicate the plans you have in place to your beneficiaries, especially those with kids,” says Eric Bond, founder and wealth advisor of Bond Wealth Management in Long Beach. “Remember, these conversations are key because once you pass, your plans are irrevocable. So, this proactive communication allows you the ability to uncover a small problem today, preventing your children from facing a big problem down the road.”

It’s also important that potential heirs open discussions so that they know where accounts and important documents are located.

“While these conversations may be difficult to broach with parents, you can keep things simple: your parents don’t have to share account balances with you but simply provide the location, registration and beneficiaries so it can be easily accessed upon their death,” says Bond.

Making estate plans can be incredibly complex and require extensive knowledge about the best way to keep and grow your assets, so an expert advisor can help you sort things out smartly.

“Individuals and families should consider engaging financial professionals to develop comprehensive financial, tax and estate plans that align with their long-term goals and values,” says Yeomans.

If you’re looking to find an advisor, Bankrate offers a financial advisor matching tool to match clients with advisors in minutes.

Building generational wealth with the Great Wealth Transfer

While the Great Wealth Transfer can be daunting, it’s a moment to get smart about finances, plan for your money to endure and even build generational wealth.

“The biggest slip-up is when the person inheriting the money fails to proactively plan,” says Bond. “Unfortunately, this often results in not investing the inheritance in the best possible way and instead spending the money unnecessarily.”

Bond points to paying “expensive and unexpected tax bills” as one place of fruitless spending.

One way that may make sense to sidestep taxes is to convert a traditional IRA to a Roth IRA. While that may involve paying taxes today, it allows heirs to avoid taxes later on, potentially after enjoying significant gains. Financial advisors can help you understand whether the move makes sense for your situation and walk through some of the complexities of an inherited IRA.

But even if you’re not going to undertake complicated maneuvers, it’s still important to understand key inheritance issues such as the step-up in cost basis on assets.

“When you inherit an asset, the value of that thing might be more than what it was when the person who left it to you originally bought it for,” says Bond. “The step-up basis is basically resetting the value of that thing to what it’s worth when you inherit it.”

Heirs may ultimately save much money by waiting to sell assets after they’ve been passed down, when they have a higher cost basis and will therefore owe lower capital gains taxes.

Finally, the Great Wealth Transfer also offers a moment to consider which assets tend to be better to build wealth over time. Long-term returns have historically been strongest in a diversified portfolio of stocks. The Standard & Poor’s 500 Index – a collection of hundreds of America’s best companies – has returned about 10 percent on average annually over long stretches.

Buying and holding a fund based on this index can deliver you the returns of the index. It’s a proven wealth-building strategy and one endorsed by legendary investor Warren Buffett.

Bottom line

A tremendous amount of wealth will move during the Great Wealth Transfer, so it’s smart to begin planning as soon as possible. Smart estate planning and investment strategies can help build wealth for decades to come, making even a smaller inheritance life-changing over time.