Over the next three to four decades, an estimated $30 trillion in wealth is expected to transfer from Baby Boomers to their heirs in the U.S. The exchanging of wealth on a small or large scale requires a certain amount of planning on the part of inheritors, but a recent RBC Wealth Transfer Study suggests that they may not be fully prepared.

According to the study, only 35% of inheritors are prepped by their benefactors to inherit wealth. The study also found a direct correlation between preparedness and confidence in wealth preservation. Among benefactors planning to pass on assets, those with a full transfer plan in place were nearly twice as likely to express confidence that the next generation will sustain their wealth.

Financial literacy is a valuable currency when wealth is set to change hands. In planning a wealth transfer, an advisor has an opportunity to play a crucial role in closing the knowledge gap.

Key Takeaways

  • Financial advisors and planners are beginning to deal with an aging client population that needs to start thinking about legacy and estate planning.
  • Knowing how to properly transfer assets and ownership of property to beneficiaries is crucial for preserving wealth, minimizing taxes, and avoiding probate fights.
  • Beneficiaries and inheritors should meet together as a family with a professional advisor to make sure that everybody is on the same page and that they can work as a team when the time comes.

What Inheritors and Benefactors Don’t Know Could Hurt Them

When transferring and receiving wealth, financial knowledge matters for avoiding potentially critical mistakes. Amy Jamrog, wealth management advisor, The Jamrog Group, Northwestern Mutual Wealth Management Company in Holyoke, Massachusetts points to two specific issues that often arise for inheritors when financial literacy is scarce.

The first is a lack of understanding regarding taxes. Jamrog cites a recent client who received a sizable inheritance but didn’t immediately grasp its tax implications. The second is a lack of a clear financial plan for allocating and leveraging an inheritance to meet the inheritor’s goals.

Establishing a relationship as early as possible with inheritors gives advisors an opportunity to lay a foundation of knowledge well before a wealth transfer takes place. “This enables inheritors to understand the goals and objectives of their loved ones and begin to plan for their inheritance, so they have an idea of what to do with it when they receive it,” says Mary Ellen Hancock, senior wealth strategist at PNC Wealth Management in New York City.

Hancock says if an inheritor is trying to manage a wealth transfer alone, “they may wind up mismanaging the funds and losing the inheritance.” She notes that problems can also arise when inheritors aren’t sure what to ask their advisors or there’s no family discussion surrounding the transfer of wealth.

The Importance of the Family Meeting

When family discussions don't take place prior to a wealth transfer, Jamrog says advisors must be willing to step in and facilitate them. The primary goal of these discussions is to allow both sides to set their expectations for the transfer.

“It’s tremendously helpful to begin the educational process with a family meeting,” Jamrog says. Advisors should educate inheritors on where the money for a wealth transfer is coming from and what type of money it is (i.e. an inherited IRA, a life insurance policy, etc.).

Parents or grandparents who are passing on their wealth can be equally in the dark. Jamrog has encountered clients who had set up their estate plan to leave taxable money to their children, while leaving less taxable funds to charity. In that situation, she was able to help them change their allocation to maximize the amount of wealth left behind.

Advisors should also be discussing the emotional component of receiving an inheritance.

“Often times, an inheritance leaves people feeling guilty or with a huge sense of responsibility,” Jamrog says. “They want to steward the money appropriately, but they become paralyzed because they don’t want to do it wrong.”

Advisors need to be prepared to help inheritors draw out and process the emotions surrounding an inheritance, so they can formulate a rational plan for using it. “It’s less about the money and more about the psychology of money,” Jamrog says.

Knowledge Builds Confidence

Money remains a mystery for many Americans and that can directly impact their financial confidence. For example, in a 2017 Northwestern Mutual study, 82% of Americans said they were somewhat or not at all confident in their understanding of investing. They cited having a better understanding of the market and their investment options as being confidence-builders.

That same principal can be applied to a wealth transfer scenario. The more inheritors know about the details of a wealth transfer and its implications, the more self-assured they may be in their decision-making.

“Knowledge is power,” Hancock says. “Clients who are well-educated about potential strategies will have a clear understanding of where they want to go, and decisions become easier to execute.”

Jamrog says confidence can grow naturally as financial literacy increases, but it must be encouraged. “These are not just factual conversations, there’s a lot of emotion tied to it,” she says. Advisors must be able to help guide those conversations, while providing inheritors with the education and tools they need to develop their confidence.

The Bottom Line

A wealth transfer—particularly one that’s unexpected—can dramatically reshape an inheritor’s financial plan. For advisors, the goal is to help inheritors maintain the right perspective both before an after a wealth transfer occurs.

“There are opportunities to create meaning, value and significance that may not have been there before without an inheritance,” Jamrog says. For advisors, the most important step in fostering financial literacy and confidence is “taking time to ask the right questions.”