During the next 25 years, Americans will transfer an estimated $68 trillion to their heirs and charities. Seventy percent of that amount, almost $48 trillion, will pass from baby boomers and most of that ($32 trillion) will go to members of Generation X. Although Americans who are currently between the ages of 50 and 70 will distribute some of their assets during their lifetimes, the remainder will get transferred through their estates after they die.
Because baby boomers will leave trillions of dollars to their heirs, they and their beneficiaries should learn about the financial consequences of this magnitude of wealth transfer. Prudent planning can prevent massive losses from unnecessary taxes and other negative financial outcomes. Every dollar that you legally avoid paying to the government, is a dollar you can one day give to charity or your loved ones.
You might want to help your adult children or your grandchildren now, rather than having to wait until you die. Unfortunately, giving large amounts of money to them while you are alive, can trigger gift taxes. Depending on the amount of the gift, you might find that a large chunk of your money went to the government, instead of to your loved ones.
How you leave your assets can also impact the tax consequences. For example, if you have a traditional individual retirement account (IRA) and you leave its proceeds to a beneficiary who is not your spouse, there can be a significant tax bill. In addition, some financial accounts have burdensome transfer fees, so you should check into this issue before deciding what to do with your assets.
One way to minimize taxes is to set up a trust. The laws are different in every state, and the applicable federal laws can change at any time. Be sure to you talk with your elder law attorney to set up your estate in a manner that takes tax consequences into consideration. This article does not give tax advice. You should talk with your tax advisor.
Talk with Your Beneficiaries
Open communication is essential, when formulating a wealth transfer plan for your family. Some of your children might already have financial security and would prefer that you give the assets you would leave them to their children instead.
Surprises are seldom a good idea. When a sizeable inheritance drops into a person’s lap without warning, the recipient often lacks the money management skills to handle the assets. This fact is why many lottery winners go broke within a year or two of winning millions. Talking with your heirs can give them time to mentally prepare and educate themselves on investments and other financial issues.
When you talk with your beneficiaries, you can suggest a team of professionals who can advise them on how to safeguard the assets they will receive. If not handled properly, for example, your loved ones could lose a substantial portion of the inheritance in a divorce.
Your local elder law attorney can advise you on how the regulations are different in your state from the general law of this article.
AARP. “Boomers Will Pass Along Trillions, Mostly to Gen Xers.” (accessed December 29, 2018) https://www.aarp.org/money/budgeting-saving/info-2018/generational-wealth-transfer.html