According to a report by Coldwell Banker, there are 618,000 millennial millionaires (born between 1981-1996) in the United States, and they’re set to inherit even more wealth from their baby boomer (1946-1964) parents.
This “Great Wealth Transfer” will see an estimated $68 trillion passed down from the boomers over the next 30 years. It’s estimated that by 2030, millennials will be many times richer than they are today.
“While the inheritance component is hard to quantify with the current data available, there are still many millennials who are not considered wealthy today, but will be in the future,” the report stated.
In fact, 66% of millennials think they’ll become wealthy one day, even though they have an average net worth of less than $10,000. Even more alarming, those currently of that age have only seen a $29 income increase when adjusted for inflation over their young adult counterparts in 1974.
Millennials’ income hasn’t kept up with their skyrocketing student debt or with housing and medical costs — which over several decades now greatly outpace inflation.
Even so, Paul Donovan, chief global economist of UBS Wealth Management, believes that millennials will be the wealthiest generation ever. Because the millennial generation is smaller than the boomer generation they’re inheriting from, he said, transferred wealth will be more concentrated. It isn’t uncommon for boomers to have two or three siblings. Many millennials, in contrast, are either the only child or have just one other sibling.
“From a big picture viewpoint, millennials will likely receive the greatest wealth transfer in modern history…however, the reality is that the baby boomers are healthier and living longer than even they planned, so that wealth transfer might not happen for 20-plus years.” Donovan adds.
So what are our takeaways from this data?
Anecdotally from my estate planning practice my clients of the Silent Generation (1928-45) and those who are Baby Boomers don’t necessarily want to wait until they die to leave family wealth down the line. They’d prefer to see their children and grandchildren enjoy benefits now.
But how is this best accomplished? Each family’s goals and desires, including the attributes of the potential recipients, leads to their uniquely right answer. Getting there is a process, however.
I usually begin by asking some pointed questions. “What would you like to see your family wealth accomplish?” As an example, education might be the most important element for those clients adhering to the philosophy of “Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime.”
Once it’s decided, the vehicle used to transfer that wealth is considered. This presents additional questions.
Going further with my education example, “How do you accomplish your goal when one grandchild is near university age but another is still in infancy? Who decides how the resources are invested prior to the transfers? How do you minimize income taxes? Who decides how much each beneficiary is entitled? Contrast, for example, the beneficiary who attends Harvard as opposed to one enrolled at FGCU.”
A successful plan thinks through the answers to these questions and more.
Aside from education, there might be a variety of other reasons to transfer wealth now. But once transferred, “Are we concerned that one of your beneficiaries gets divorced and loses amounts that you earmarked for her?”
Some families hope to provide a retirement safety net for their loved ones, especially since company pensions from lifetime employment are largely relics from the past. “I’d like my children to continue to work and earn their own way,” a client says, “but I want to provide them a comfortable safety net. I want their retirement to include a roof over their heads and adequate health care.”
Here, different strategies are employed. It might involve purchasing long-term care insurance for the adult child beneficiary, or establishing a trust that doesn’t pay income currently, rather it accumulates income until the beneficiary reaches retirement age. When irrevocable trusts accumulate income, however, there is a compressed federal income tax rate schedule that result in higher taxes. Consequently growth rather than income strategies are called for.
Providing written direction to the trustee within the trust document is critical to success.
For those families that might encounter federal or state estate taxes, additional issues arise. While current federal exemption amounts shield more than $11 million, the next election may adversely affect the law. Even without a change in 2020, the current estate tax laws sunset in 2025 absent new legislation.
Families with a potential estate tax problem generally should not transfer assets dollar-for-dollar. In other words, it’s not wise to fund a trust with $500,000 in cash or investments since you’ll use $500,000 of your estate tax exemption. Here you want to employ strategies where you might transfer $2 million of value but only use $500,000 of your estate tax exemption.
By and large, these are good problems to have. I have millennial children who are just starting out to make their way in the world. Some financial struggles aren’t necessarily bad. But assuming enough resources, I would like to build a safety net for them that I never had.
One thing’s for certain. At least as far as my family is concerned, the millennial news articles are right. I won’t inherit anything from my parents, nor my wife from hers. Whatever we leave our children will be more than what we received.
© 2019 Craig R. Hersch. Originally published in the Sanibel Island Sun.