Planning for the Coming Intergenerational Wealth Transfer – National Association of Plan Advisors

family wealth planningAs Baby Boomers enter retirement and look to structure transfers of accumulated wealth, a new report suggests that advisors need to be prepared to ensure the transition is as smooth and as tax-efficient as possible.

In fact, U.S. households are expected to transfer close to $70 trillion to their heirs and charities by 2042, with Boomers expected to pass on upward of 73% of this amount or a total of $51 trillion, according to the third quarter, 2021 issue of The Cerulli Edge—U.S. Advisor Edition.

And attrition risk among younger investors is significant, the report warns. According to Cerulli, more than 70% of heirs are likely to fire or change financial advisors after inheriting their parents’ wealth.

As such, with the increasing need for intergenerational planning and engagement, conversations are necessary at all levels of the family, the report emphasizes. Advisory practices that have not already done so will need to shift their mindset and strategically engage their clients’ spouses and children on a more regular basis.  

“While advisors that continue to neglect younger family members are at greater risk of losing assets, those who proactively provide their clients with thorough guidance, proper access to legal and tax specialists, and engagement with all stakeholders to the estate being managed are positioned to capture the greatest share of wealth across decades,” the report states.  

Additionally, Cerulli suggests that hiring and training younger advisors to develop “better emotional connections and gain deeper insights” into younger clients’ interests and livelihoods will become critical for not only remaining competitive, but also to properly plan and adapt to potential future tax changes.

Effective Planning

To be sure, tax efficiency will become increasingly important, given that most of the wealth is held by older, high-net-worth (HNW) investors—those with greater than $5 million in investable assets—and will likely be subject to more extensive taxes in the coming decade, the report notes.

For advisors serving older HNW clients who prioritize tax minimization, emphasizing the importance of preemptive and adaptive planning is critical, particularly in the current political climate. Federal tax changes recently proposed by the current administration would hike the top-line capital gains tax rate, applying to earnings exceeding $1 million.

President Biden’s proposal would nearly double the level of taxation from its current maximum rate of 20%, to run parallel with his proposed top-level ordinary income tax rate proposal of 39.6%. Even though this is expected to apply to only 0.3% of the population, that still means close to one million of the wealthiest households would be affected by this change, the report further observes.

“Advisors planning for clients who have significant capital gains exposure beyond the million-dollar threshold should consider stringently managing taxable income by realizing gains up to certain levels, if possible, and plan a strategic gifting and/or donation plan,” says Cerulli analyst Chayce Horton.  

With the rates being posed by policymakers, advisors are quickly realizing that resorting to deferrals of gains and income—which has been a major facet of tax planning for years—may no longer be an effective base plan for clients. Though nothing is final yet, the report suggests that advisors serving HNW households will likely need to put a greater emphasis on sequencing taxable income events as part of regular ongoing tax management, in addition to advanced preemptive estate planning.

“The looming wealth transfer presents a significant opportunity for advisory firms that can adapt to a shifting landscape and evolving wealth demographic,” says Horton. “It remains critical for wealth management firms to have thorough discussions with clients and ensure they have well-designed and adaptable intergenerational plans in place.”

According to surveyed HNW practices, using trust vehicles (71%), family meetings (57%) and educating family members (55%) are considered the most effective wealth transfer strategies.

Advisors also need to be prepared to leverage various vehicles and strategies, such as strategic gifting and donating, use of dynasty and living trusts, and use of grantor-retained annuity trusts, all of which can help clients minimize taxes while remaining adaptable to potential changes in regulatory treatment, the report further emphasizes.