Preparing for Wealth Transfer

A financial tsunami is rapidly approaching. Over the next several decades, the largest generational transfer of wealth in history will take place. The era of retiring baby boomers has arrived. Roughly 10,000 baby boomers turn age 65 every day and this trend will continue for the next 18 years. It has been estimated that $30 trillion in assets will pass from baby boomers to their Gen X and millennial children when they pass away.

Unfortunately, many of the heirs are ill-prepared to handle this financial windfall. A study of 3,200 families conducted by The Williams Group concluded that 7 out of 10 second generation family members lost their inheritance during their lives and a full 90% of the third generation lost the remaining portion. Millennials have been characterized as pampered and devoid of financial responsibility. As a result, these heirs would appear to be most at risk and likely to extend these onerous statistics.

The numbers are alarming. To reverse this trend, the future heirs must become educated about finances. The education phase should provide them with the resources to gain valuable experience about managing money. A great starting point is a gifting strategy from the boomer parent to the children that launches planning for lifetime financial goals such as retirement and education. Funding plans such as a Roth IRA or a 529 college savings plan and encouraging the heirs to manage the account can be a platform to promote financial education.

The boomer should disclose the size and nature of their assets as well as the distribution plan in place. Many boomers will likely resist this path out of privacy concerns and the fear of upsetting family members who may feel slighted. However, over my 39 years in practice, some of the biggest post mortem estate planning problems arise when the deceased has not shared their estate plan with the family. Tackling potentially sticky issues with the family such as funding special needs for an impaired family member, preparing for the impact of divorce, or protecting assets from potential creditors, can alleviate future problems.

The second phase of disclosure is conveying to the family the boomer's philosophy about money and the vision he/she has for its deployment after they have died. A main purpose of this conversation is to avoid frivolous spending by the heirs on luxury items such as expensive cars, extravagant jewelry and exorbitant vacations while instead directing the assets to pursue personal goals such as retirement, education and charitable giving.

In order to facilitate a smooth transition and to provide clarity as to the intentions of the boomer, the participation of trusted advisors such as the accountant, estate planning lawyer and wealth manager/financial planner should be encouraged. Select family members (executor, trustees, etc.) should be made aware and have access to all pertinent documents such as wills and/or trusts, property deeds, life insurance policies, investment statements, etc.

During my client reviews over the past year, I have reinforced the idea that we relish the opportunity to meet with our client's children and grandchildren. Our goal is to assist in the education process and prepare these young people for the inheritance they will receive in the future.

As many of you know, my son, Stephen, joined the practice about a year ago. One of his main tasks is to work with the children and grandchildren of our clients and introduce them to the financial planning process. We look forward to working with multiple generations for all our clients.

This wave of wealth transfer is imminent. The sooner the education process begins, the more seamless it can be.

I hope you are enjoying the summer.


Clifford L. Caplan, CFP®, AIF®