Should You Begin Transferring Your Wealth?

By Gordon J. Bernhardt, CFP®

Wealth Manager, Principal

January 10, 2023

There’s an often-quoted maxim regarding inherited wealth: “The first generation makes it; the second generation builds it; the third generation blows it.” Indeed, uncertainties around the next generation’s ability to exercise wise stewardship of family wealth have led to the drafting of many a trust document, many clauses in wills, and much misgiving in those who created or built the legacy that will be entrusted to those who may or may not be ready.

And it’s not a minor matter. By some estimates, the Generation X and millennial generations (roughly, those born between 1965 and 1996) stand to inherit some $68 trillion from their (mostly) baby boomer parents over the next couple of decades. All over the world, parents and trustees are looking at their heirs and asking themselves, “Are these kids ready?” For many, the obvious answer is to delay the transfer as long as possible, hoping that added maturity and experience will bring wisdom.

On the other hand, we should remember that the present younger generations face a different financial landscape than their boomer predecessors. Though millennials are statistically more likely to have a college degree than their parents, they do not have the benefit of the rapid economic and employment expansion enjoyed by their parents. Some analysts have estimated that millennials have 41% less wealth than someone who was their age in the late 1980s. In other words, they are entering and pursuing their careers in an environment that is, in many ways, less advantageous than their parents experienced.

So, there may be circumstances in which it makes sense to begin some portion of the wealth transfer early, before the passing of the oldest generation. Judicious and strategic passing of wealth now can facilitate greater understanding and responsibility on the part of the heirs, as well as the opportunity for the first generation to provide counsel and other non-financial resources to better prepare the inheritors for greater responsibilities to come.

First, not all wealth transfers need to involve huge sums. Smaller, more targeted measures can prove valuable to the younger generations, setting them up for more success in the future. Some parents and grandparents, for example, choose to heavily subsidize certain “starting out” expenses, such as higher education or the purchase of a first home. Decreasing the debt burden of the heirs can allow them to avoid unproductive behaviors such as credit card traps and failure (or inability) to establish the habit of saving and investing.

Also, initiating aspects of the wealth transfer early allows the older generation to see the effects and benefits of their legacy. They can also provide feedback and advice on important principles like avoiding debt, managing risk, making wise purchases, and incorporating philanthropy into their financial planning. Sometimes, lessons like these are more effectively communicated in person, rather than through the terms of a trust or will.

Finally, since any wealth transfer decision ultimately is in the hands of the grantor, it’s important to communicate expectations and planning with the heirs. If you are firmly convinced that giving your wealth to your children will only ruin them, they need to know that now, rather than waiting to learn it when the will is read. This gives them the opportunity to prepare without false assumptions about assets that are not coming. On the other hand, if they are to receive the benefit of your wealth upon your passing, now is the time to begin communicating with them about the coming responsibilities that go along with access to resources.

As fiduciary wealth advisors, Modera Wealth Management works closely with our clients to build estate plans and investment strategies that support successful legacies. To learn more, read our article, “Introduction to Estate Planning.”

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