84 Trillion Reasons Why Having a Financial Advisor May Be More Vital Than Ever

It’s been dubbed the “Great Wealth Transfer” — a massive intergenerational shift in assets that will reshape the American financial landscape. Just how large?

Boston-based financial research firm Cerulli Associates projects $84.4 trillion will be transferred to family members and charities by 2045, including $72.6 trillion in assets that will pass to heirs. While the majority of wealth will shift from households in the baby boomer generation, it’s Generation X and millennial households that stand to gain the most in the coming decades, as they will inherit the lion’s share of assets, according to Cerulli.

This massive reshuffling of the deck underscores the need for sound financial planning, namely effective estate planning. Wills and trusts can be vital tools in the estate planning process, but a financial advisor can also be an important resource to tap in advance of this mega transfer of wealth.

How Wealth Will Change Hands

Examining the Great Wealth Transfer through a generational lens offers the simplest view of this decades-long phenomenon.

According to Cerulli’s projections, 63% of the total wealth ($53 trillion) that will be transferred by 2045 is currently held by the baby boomer generation. Unsurprisingly, 42% of the overall volume of transfers is expected to come from high-net-worth and ultra-high-net-worth households (those with $5 million and $20 million in investable assets, respectively).

On the receiving end, Generation X households will benefit the most from the Great Wealth Transfer. Of the $72.6 in assets that will be transferred to heirs by 2045, Generation X will receive $29.6 trillion or 40.7%, while Millennials will inherit $27.5 trillion or 37.8%. Gen Z households will also receive $11.5 trillion, according to Cerulli.

And Baby Boomers won’t just be transferring wealth in the coming years, they’ll also inherit about $4 trillion.

To contextualize the sheer scale of this ongoing wealth transfer, Cerulli notes that a decade ago it projected $38.7 would be transferred in the next 25 years, less than half of its current projection. At the time, the firm predicted up to $1 trillion in annual transfers throughout the 2010s before they would increase to $2 trillion annually by the mid-2030s.

“However, with the massive levels of wealth accumulation that have occurred in recent years, we currently expect $2 trillion in annual wealth transfers to be surpassed just a few years from now,” said Chayce Horton, an analyst at Cerulli Associates. “More significantly, we expect even greater volumes of wealth to be transferred in the later portions of our 2021-2045 range, with annual transfers surpassing $4 trillion by 2038 and $5 trillion by 2043.”

How to Plan For the Wealth Transfer

Working with a financial advisor is one of the best strategies for managing inherited wealth. Financial advisors, especially those with estate planning expertise, can also be important resources for households that plan to transfer considerable wealth to future generations or charities.

Whether you plan to transfer assets to others or you expect to be on the receiving end of those transfers, here are some essential estate planning concepts to familiarize yourself with:

Wills vs. Trusts: Which is Right For You?

Wills and trusts are two types of estate planning tools by which a person can transfer assets and property to others. With a will, a person can formalize their wishes for how their property should be distributed and assign guardians for any minor children they have. Wills are extremely common and relatively easy to create, but they must go through probate when a person dies. This is the legal process by which a court examines a will and ensures any of the state’s debts are paid by the will’s executor.

A trust, on the other hand, allows an estate to avoid probate. While wills typically take effect when a person dies, a trust can be activated immediately after it is created and signed. Trusts allow you to transfer assets into a separate entity that is managed by a trustee, which can either be you or another party.

Trusts come with many benefits, including the ability to establish rules or requirements that beneficiaries must meet to receive their inheritance, as well as the preservation of assets for the care of minor children in the event of your death. Trusts, which can be irrevocable (permanent) or living (can be changed), can also potentially reduce estate and gift taxes.

Be Mindful of Annual Gift Tax Limit

In 2022, the federal government permits individuals to give up to $16,000 to as many people as they want each year tax free. Gifts that exceed this limit may trigger the gift tax, but only after a person goes over their lifetime limit (see below). This legal loophole can be a useful tool for people who want to begin giving away their wealth while they are still alive.

Know the Estate Tax/Gift Tax Lifetime Exemption

While the gift tax is a levy on gifts that exceed the IRS’s annual limit, the federal estate tax may be owed when a person dies. However, most estates won’t trigger this tax since it only applies to relatively large estates. In 2022, Uncle Sam exempts the first $12.06 million a person leaves to beneficiaries when they die and/or gives away while they’re still alive. Estates and gifts that exceed this exemption limit, which is adjusted annually, are taxed at a rate that falls between 18% and 40%, depending on how far over the threshold the estate or gifts go.

There are also estate taxes in some states, so make sure you know your local laws.

Bottom Line

The Great Wealth Transfer that is currently underway will see $84.4 trillion transferred by 2045, according to Cerulli Associates. While baby boomers and high-net-worth households currently own the majority of these assets, Generation X and millennial households will receive the bulk of this money. Working with a financial advisor, establishing a will and/or trust, and tracking the federal estate/gift tax exemption limits may help you prepare for an eventual windfall.

Estate Planning Tips

• A financial advisor can do more than just manage your investments. An advisor with estate planning credentials can help you plan future bequests in a tax-efficient manner. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• There is a wide variety of trusts suitable for different financial needs and situations. Read up on the various trusts that an estate planning attorney or financial advisor can help you establish.

Photo credit: ©iStock.com/FatCamera, ©iStock.com/kate_sept2004, ©iStock.com/designer491

The post 84 Trillion Reasons Why Having a Financial Advisor May Be More Vital Than Ever appeared first on SmartAsset Blog.