The Great Wealth Transfer is one of the largest transfers of wealth to happen in our history. Market research from Cerulli 1 and Associates estimates that $84 trillion in assets will be inherited around 2043 with $72.6 trillion going to heirs and $11.9 trillion to charity*. While the prospect of a grand inheritance is outstanding for most families who are balancing mortgages, childcare, student loans, and caring for aging parents, they can come with unforeseen financial complications.
Here are some tips on what you need to understand if you are set to have an inheritance during the great wealth transfer.
- Not All Assets Are Equal
It is important to understand the types of assets that you are going to inherit. While some think that they are just going to be getting a check when great aunt Mildred passes away, that is not always the case. You can inherit all different types of assets in addition to cash including securities, real estate, collectibles, cars, jewelry, antiques, and even pets. It’s important to understand the types of assets that you are inheriting so that you can understand how that will impact your ideal asset allocation.
- With Great Wealth Comes Great (Tax) Responsibility
Not all assets are taxed the same way. This is why it’s so important to have your estate planning properly drafted and updated to ensure that any assets that should be placed in a trust or have a beneficiary updated are taken care of in a timely manner. It’s important to know what tax bracket you are in currently and if your inheritance will move you up another bracket as this will impact how your total earnings for the year are taxed. It is also important to know what your tax liability will be on the inherited assets, especially if it is an asset that you want to keep and not have to liquidate to pay the taxes (like a family vacation home).
- Preparation is Key
Communication makes these transitions much easier for everyone. It is important to prepare your family for what they are going to inherit and if you have any special intentions for how these assets should be utilized. Depending on the tax liability of the family member set to inherit it might make more sense to start gifting sums of money on an annual basis rather than having inheritance tax take a whack out of what you intended to pass down. Currently the lifetime gift tax exemption is $12.92 Million (set to drop by $6 million by 2026 2).
- Don’t Be Like the Lottery Winners
If you are set to inherit a large sum of money you want to ensure that you are prepared to do so. Before the overwhelming urge to immediately start spending (yes, even on debt) your windfall. You want to be sure to get a team together who can ensure that your assets are protected, tax liability is addressed, and that the current asset allocation of your current estate is not out of balance due to the inherited assets. You don’t want to end up like 70% of lottery winners who are broke within seven years 3, you need to have an effective plan in place.
- Beat the 90% Rule
You don’t want to be another statistic of the 90% rule either. What is the 90% rule? 90% of money that is inherited is gone by the 3rd generation. The 1st generations makes it, the 2nd grows it, and the 3rd spends it. If you want to truly create generational wealth like the Rockefeller family who is in their 7th generation with over 170 heirs 4, you need a team on the cutting edge of complex planning and wealth structuring tactics. That is where our firm of subject matter experts has all of the resources, specialists, and knowledge to ensure that your legacy will endure, and you will have some fun along the way! If you are set to inherit wealth or are planning to leave a legacy, schedule a free consultation with us today at www.nwsadvisors.com and learn how you can be the most efficient with your estate.
Sources:
- https://www.cerulli.com/press-releases/cerulli-anticipates-84-trillion-in-wealth-transfers-through-2045
- https://smartasset.com/retirement/lifetime-gift-tax-exemption
- https://blog.gitnux.com/lottery-winner-statistics/#:~:text=winning%20a%20lottery.-,Approximately%2070%25%20of%20lottery%20winners%20end%20up%20broke%20within%207,they%20are%20located%20in%20Europe.
- https://www.documentarytube.com/articles/the-rockefeller-family-wealth-from-poverty-to-billionaires/#:~:text=Due%20to%20taxes%2C%20spending%2C%20the,managed%20to%20sustain%20their%20wealth.
