The United States is currently going through what financial experts call “the great wealth transfer,” in which a colossal amount of assets changes hands – setting off a major chain reaction.
According to a report from Cerulli Associates, more than $84 trillion (with a T) will change hands through 2045. While nearly $12 trillion will go to charity, the rest will be passed directly to heirs.
“Coming out of the financial crisis, we have seen the creation of a tremendous amount of wealth, and American families are richer than ever,” says Chayce Horton, senior analyst at Cerulli. “There are tens of trillions of dollars in circulation, and most of it is controlled by families who are over 65.”
But things are about to change. As older generations pass away, they pass that money on to Gen X, Millennial and Gen Z families, who tend to have different perspectives on wealth than many baby boomers. No matter how old you are, that means it’s never too early to prepare.
What is the great wealth transfer?
The great wealth transfer is “the most significant intergenerational wealth transfer we have ever seen in the world,” Horton says. Fundamentally, it carries a number of social implications.
The first, of course, is the fact that a group of young people are on track to earn a lot of money: “a seismic shift,” as one expert put it in a recent Knight Frank report.
Those young people have very different ideals from those of their ancestors; in particular, they are incredibly focused on sustainability and social responsibility. As a result, according to the report, “they are likely to direct significant amounts of capital towards causes that go beyond simply maximizing economic growth.” This is yet another major reversal from what we are used to.
The great wealth transfer will not only affect the super-rich. People who own their homes or even just have significant savings in their 401(k)s will likely pass them on, changing the financial equation for their descendants.
“Nearly 50% of Americans say they expect some sort of inheritance in the next 10 years,” says Lena Haas, head of wealth management consulting and solutions at Edward Jones. “So clearly the impact is very, very broad.”
Estimates of individual amounts vary. One analysis says most millennials expect to inherit at least $350,000 from their relatives, while another says most assets will be eaten up by healthcare expenses.
But the consensus is that the financial strategies of the recipients of these inheritances, donations, real estate, businesses and family heirlooms will be totally shaken. While traditionally young people have built their wealth through investments, Horton says there will be a huge portion of the population who will now have their financial well-being “at stake in what they will receive from their parents or grandparents”.
“We see that over the next 25 years, inheritances will be more of a determinant of family wealth in younger generations than they have ever been,” he adds.
How to prepare for the big wealth transfer
It’s clear how the big wealth transfer could affect young Americans entering the world of money. But it could have a ripple effect that will impact the people who do it I’m not while also benefiting from intergenerational wealth.
Let’s say you have carefully saved money for years to buy a house. You may end up in a bidding war against a person who has received a huge inheritance, which, combined with his savings, could allow him to easily outbid you.
Unfortunately, Haas says, research shows that neither donors nor recipients appear to be ready to face the consequences of these wealth transfers. (For example, 19% of people who receive an inheritance say they feel anxious about it.) It’s an inherently emotional and embarrassing topic, so they avoid talking about it… and that can leave everyone at a disadvantage.
He recommends that families make it a priority to sit down, perhaps with a financial advisor, and talk transparently about their plans. What are their values as a family? How do they approach charitable contributions? Does one child need more support than others?
“It’s very important, regardless of where your dollars and cents go, to have conversations about legacy values and the underlying reasons why decisions are made,” Haas says.
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