What is the Great Wealth Transfer?

Up until recently, Baby Boomers were the largest living generation. However, according to the latest census data from 2015, Baby Boomers are now outnumbered by the millennial generation. Even though their population is smaller, they are still the richest generation. In 2015, it was estimated that Baby Boomers controlled 70% of all the disposable income in the United States.

As the Baby Boomer generation gets older (last year the first Baby Boomers turned 70.5), it's inevitable that their unspent assets will get passed on; it's estimated that over the next 20 years, there will be a transfer of wealth that surpasses $30 trillion. Some estimates put that number as high as $59 trillion. What is projected to be the largest transfer of wealth in history has been named the Great Wealth Transfer.

Plan For a Correct Transfer

It takes some planning to make sure that your assets end up where you want them to, and with as little friction and expense as possible. It’s important for both generations, those who are looking to pass down assets, and their beneficiaries, to review their options. Although the circumstances that necessitate the transferring of assets are not pleasant to think about, this transfer of wealth is inevitable.

Transferring assets after death can be complicated. Different types of assets have different rules. Distributions from retirement accounts can be confusing and may be subject to taxes, depending upon how the funds are distributed. Other investments might have to go through probate, which is part of the public record and can be expensive.

Set Aside Assets for Retirement and Healthcare Costs First

When starting to put together a plan to transfer your assets, the first priority is to make sure that you have enough money to comfortably live out your retirement years. You should also consider the costs of future health care needs, including the possibility of needing to pay for long-term care. After accounting for retirement and healthcare costs, you can develop a plan for whatever assets are left. Consider these questions:

  • Do you plan to be charitable with your estate?
  • What about your family?
  • Are there kids, grandkids, or other family members who you would like to leave something to?
  • Are there any family members with special needs?
  • Will there be conflicts between beneficiaries?

Get Your Beneficiaries Involved Early

Once you have a general idea of your plan, I recommend a family meeting. In this meeting, you should make sure that everyone who is involved is on the same page. You may even consider having qualified advisors or professionals attend the meeting so that any technical questions can be addressed. Starting the conversation early will help your inheritors. They can start becoming familiar with your important financial details, like your wills, trusts, insurance policies, investment and bank accounts, and any other assets.

Create Estate Plans With a Professional

Next, consider making an appointment with an estate planning attorney. If you have assets, it’s worth the expense. A good attorney can help you make sure that your estate documents are set up so they properly carry out your wishes. Estate plans should cover the basics: You should have a current will, healthcare directives (also known as a living will), and powers of attorney that allow for someone you trust to make financial and health care decisions for you when you cannot.

A Trust Creates Structure For Your Assets

Depending upon your situation, the attorney may recommend a trust, which is a useful tool to pass on wealth to the next generation. Structured properly, it can specify when your beneficiaries receive their money (at a specific age), and how that money can be used (for education or health care expenses). Your estate plan should also include a step to make sure that your beneficiary arrangements are current. Lots of people forget to change the beneficiary on their various accounts when they change jobs, get married, have children, or get divorced.

Beneficiaries of Wealth Transfer Should Have a Plan

If you are a beneficiary of the Great Wealth Transfer, you should have a plan in place as well. Whether you expect to receive a little bit of money or a lot of money, a plan will help you make the most of it. One of the first things to consider is the tax impact of the money you will receive. Retirement accounts and annuities have tax consequences that differ from other assets. Make sure you understand the tax burden before you request any distributions. In this situation, it may be beneficial to seek the help of a tax professional so they can help you navigate the process with as little taxes owed as possible.

Use Inheritance to Pay Down Student Debt

Not everyone is prepared to receive a large sum of money, and without a plan, it's easy for beneficiaries to quickly spend their newfound wealth. If you put some guidelines in place, you can make sure you don’t mishandle your share. A recent survey found that 63 percent of millennials have more than $10,000 in student debt, with a large majority of them saying that the debt has significant impact on their ability to meet financial goals. If you are one of them, one of the best things you could do with your inheritance is pay down school loans, and any other debt. If you have student loans, it's more likely that you haven’t accumulated much in your retirement accounts, so it would also be wise to use some of what you inherit to make your retirement more secure.

There’s nothing wrong with doing some fun things with money that you receive. In fact, your benefactor would probably want you to. Take a vacation, fix up the house, maybe upgrade your car. But handling an inheritance responsibly is the best way to honor the loved one who passed it along to you.