The great bequeathment is here! Baby Boomers are set to transfer a colossal quantity of wealth. They’ll be transferring almost $1 trillion to young Baby Boomers, Gen X and Millennials over the next decade. Not just that, a sizeable quantity is also going to be transferred within the same generation. For example, from one partner to another. As a big chunk of the population is set to inherit wealth, this conjures some important questions. Are inheritors and inheritees conversing enough about the transfer during their lifetime? What are the tax implications? What is driving individuals to transfer wealth during their lifetime? Perhaps most importantly, have the inheritors created a financial plan that incorporates this bequeathment?
Kickstarting the conversation on estate planning
Family members tend to steer away from conversations around wills and estate planning because of the morbidity of the topic. However, the pandemic has spurred an attitude change, for the good of the entire family. How assets will be passed down and what should be done with them is something that should be a dinner table conversation as the stakes are huge. No clear will or understanding by both parties can lead to disastrous consequences. Hard-earned wealth accumulated by the transferring generation lies at the alter of the courts instead of their loved ones, the intended recipients.
While the conversation should ideally be initiated by the transferor generation, in the event of that not happening, adult children should start talking to their parents about it. Of course, not before they’ve educated themselves about handling the estate. Most kids would want to execute their parents’ wishes. It’s important to build trust in the parents of their capabilities in being able to do that and the first step is financial literacy. Adding a third party like a financial advisor or a mediator could help bridge any generational gaps.
For the parents, money conversations should start when their children are young adults. This would better prepare them for when they receive their windfall via wealth transfer and in turn, lend parents confidence in their children being capable of efficiently managing wealth.
Tax implications of wealth transfer
Benjamin Franklin’s quote, “Nothing is certain except death and taxes,” is poetically fitting here. While one hopes their estate is seamlessly transferred to their loved one upon death, it shouldn’t be accompanied by a huge tax bill either. It’s noteworthy though that In Canada, it’s the estate that is taxed, and not the beneficiary. The right estate plan incorporates tax planning to minimize tax impact and maximize wealth. It also ensures that changes in tax laws are incorporated into the plan. Primary place of residence and cash transfers generally are exempt from tax. Hence, a simple strategy is to assign the real estate with the highest capital gains as the primary place of residence. This describes the importance of anticipating capital gains. Similarly, gifting assets is another way to alleviate the tax burden. This brings us to the discussion of how wealth transfer is happening during the transferor’s lifetime
Wealth transfer during the lifetime of the individual
Many individuals would like to see their children enjoy the fruits of their labour while they’re still alive. Helping children with a college education or a down payment for a home is becoming common considering how with every passing generation affordability is becoming an issue. For most parents, the intended recipient of their hard-earned wealth is their children. Considering the added benefit of tax exemption, it makes fiscal sense to take this route. However, it’s important to note that liquidating an asset to pay for the child’s expense or down payment will lead to a capital gains tax. It would be more prudent in that case to bequeath the asset in question to the child, thus deferring the tax liability.
Preparing for an inheritance
Wealth transfer is commonly associated with individuals with net worth running into billions. However, it’s even more important for the middle class to put careful thought into the process. Estate planning is essential regardless of the amount. This process should begin in anticipation of receiving it. Failure to do this may lead to parking the windfall in incorrect asset classes, erosion in the value of the estate or a large estate tax bill.
Conclusion
The implications of the great wealth transfer are largely a mixed bag for the economy. The torch is being passed on to a different generation and we’re yet to see how they deploy the money. Wealth managers will also have to go back to the drawing board and offer differentiated financial services from those provided to Gen Xers or their ancestors. However, for anyone reading this, a financial plan is an absolute must to ensure that the wealth created by your bequeathers is not squandered.
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