“The Great Transfer of Wealth”

More than 10,000 baby boomers are turning 65 every day and that is expected to continue until 2030.  Over the coming decades, trillions of dollars of wealth will pass from baby boomer parents to their heirs, with some estimating the transfer total as high as $30 trillion.  In no prior time in the history of America has such a vast amount of wealth moved through the hands of generations.  As the baby boomer name suggests, the generation represented a sudden growth in population post World War II.  After decades of relative prosperity and economic growth, the baby boomers have amassed significant financial wealth and currently control roughly 70% of disposable income in the United States.  So, when these trillions of dollars start to change hands, what will this mean for the country?

Tax and Estate Laws will take Center Stage

When most people think about taxes, they consider the federal income tax brackets, or maybe even their state income tax levels.  While these are certainly important, estate tax exemption laws may be the biggest area of focus for large wealth transfers over the coming decades.  As recently as 2005 an individual could pass up to $1,500,000 to heirs without paying any taxes on the transfer.  In 2017 the figure was $5,490,000.  When the Tax Cuts and Jobs Act (TCJA) was passed in December 2017, this value was increased to $11,180,000 and continues to increase with inflation until 2025.  This increase has led to many planning changes for high-net-worth families as they think about structuring their wealth to try and pay as little tax as possible.  With a new administration coming in 2021 and with the TCJA expiring in 2025, the estate tax exemption amounts will be a big focus area for families as well as politicians trying to generate more government revenue.

Caregiving Decisions will be Important

The Great Wealth Transfer won’t just be about giving money to adult children. It will also redefine many aspects of the economy as the baby boomer generation ages into new medical needs.  Put simply, some of this wealth will transfer to the baby boomers’ children, but a lot of it will transfer into the medical system.

Senior health care will continue to grow and become a massive force in the U.S. economy. The baby boomer generation dwarfs any other in history, larger even than the two generations that followed it. (Only Generation Z, born after 1997, is now larger.) They will need more health care, and more specialized health care, than their parents did, and paying for that is going to consume a large portion of their resources. Managing that transfer of wealth and the decisions on how to care for aging parents will become an important issue for families across the country.

Financial Literacy and Communication is Key

For many families, the estate tax exemptions are so far beyond their assets that it isn’t a consideration.  However, regardless of the amount of wealth being transferred, ensuring the next generation is equipped to handle this wealth is important.  According to a 2018 study by TIAA institute, only 11% of Millennials displayed a “relatively high” level of financial literacy, with another 28% of the group conveying a “very low” literacy rate in finances.

One way that boomers can help inheritors handle the passing of wealth is simply by talking about their plans.  According to a study by RBC Wealth, only 35% of inheritors are prepped by their benefactors to inherit wealth.  If someone is prepared to inherit wealth and understands the legacy and wishes of the former generation, then they can approach the process with more confidence.  If you haven’t already, consider whether it may be time to have a “family wealth conversation” to begin sharing your wishes and plans for how wealth will be passed down. 

This massive shift of wealth, and the accompanying planning and conversations are not always easy.  Family dynamics, strained relationships, and differing values are all important aspects to navigate.  Thinking through these issues early and often can at least help to alleviate any surprises when the time eventually arises.