Planning for your death can be somber, which is why estate planning is often an unpopular part of financial planning. Organizing assets and allocating them to family and friends in the event of death or severe injury requires time and consideration.
Wills, trusts, living wills, and powers of attorney are standard documents to have in place, but market volatility and taxes can significantly affect inheritances, especially for high net worth individuals.
Gift and Estate Taxes are typically based on inflation rates, although the Tax Cuts and Jobs Act (TCJA) doubled the tax exemption to nearly $12 million for single filers and $22.8 million for married filers. The TCJA is set to sunset in 2025, and the winner of the 2024 election will impact inheritances for at least the next four years.
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Gen X and Millennials will receive the bulk of the wealth transferred from older generations, and how they plan to manage those funds will shape their future financial health and could even impact traditional investment markets.
We spoke with Lena Haas, Principal and Head of Wealth Management Advice and Solutions, to discuss how the generational wealth transfer will affect the investment portfolios and buying power of younger generations.
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How a large-scale transfer of wealth will impact the economy
Younger generations have a greater affinity for alternative markets and may choose to invest their inheritance differently than their parents. Wealthy investors aged 21 to 42 show a greater affinity for private equity, private debt, and direct company investments.
They’re also far less confident that traditional assets like stocks and bonds can earn the large returns they’re looking for. This means traditional assets may not be as popular with high-net-worth investors going forward.
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Haas explains what to expect from the transfer of wealth over the next few decades.
“The great wealth transfer refers to the process of almost half of Americans receiving some sort of inheritance over the next 10 years,” she said.
“In the next two decades, 84 trillion of assets are going to pass hands from the silent generation and baby boomers to the youngest generation,” she continued. “So whether we’re the givers or receivers, it affects almost all of us.”
Transparency is the key to successful estate planning
“Despite the fact that just about everybody is affected, the conversations across family members are not happening," she said. “So my first tip is to have the talk. The talk needs to happen before the actual transfer.”
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Haas continued to explain that transparency between parents, family members, and children about how much money to expect and set expectations for how they’d like to see that money used may be helpful for all parties involved.
This dialogue also allows recipients and beneficiaries time to build a strategic investment plan.
“It's so important to share your plan with family members. If you're a giver, what are you thinking in terms of family legacy?” she said. “What are you thinking in terms of values and life and financial choices that support that?”
“Having that talk makes all the difference between the legacy of just confusion and hurt versus the legacy of love and care.”
Related: Veteran fund manager sees world of pain coming for stocks
