Inheritance has become a hotly debated issue as baby boomers prepare for retirement and their parents face their twilight years. According to the Federal Reserve Bank, approximately $200 billion is passed from parents to children annually in the form of inheritance. The Boston College Center for Wealth and Philanthropy estimates that by 2050, more than $25 trillion will be transferred to the baby boomer generation. Despite this high level of wealth transfer, it is estimated that 91.9 percent of the population will not inherit anything and of the 8.1 percent who do, half will inherit less than $25,000.
If you are a baby boomer, post baby boomer or “echo” boomer—those born between 1982 and 1995—how do you create an environment where generational wealth transfer benefits you? Here are five steps that you can take to ensure that assets accumulated by elder family members reach your generation and remain in your hands.
Educate family members on the importance of generational wealth transfer. This is critical to sustaining family wealth. The discussion can be uncomfortable because it deals with the emotional issue of mortality and can lead to the perception among some family members that you are greedy. However, without the discussion and taking the appropriate steps to protect family assets, your generation will be forced to repeat the financial start-up pattern of past generations.
In his book, Everyone’s Money Book, Jordan Goodman suggests approaching the subject from the standpoint of your personal estate planning. This allows you to discuss your thoughts on transferring family wealth with family members without directly discussing their assets. During the next holiday or family gathering, talk to the family elders about generational wealth transfer.
Identify and protect existing family assets. One of the many reasons wealth is not transferred to the next generation is because the assets are simply lost. Take the experience of African-American rural landholders. In the early 1900s African-Americans owned an estimated 16 million to 19 million acres of rural land in America. By 1999, according to the Agricultural Economic and Land Survey, they owned just 7.7 million acres, less than 1 percent of all privately owned rural land in the country. Still, this land is worth an estimated $14 billion.
Unfortunately, much of the land was lost because of poorly conceived ownership structures, incomplete deeds, lack of estate planning or loss through tax and partition sales. In addition to lost real estate, tens of billions of dollars in stocks, bonds, certificates of deposit, dividends and insurance policies go unclaimed and thus cannot be transferred to the next generation. To determine if your family has unclaimed assets, visit www.unclaimed.org and/or www.missingmoney.com.
Use insurance to protect your family elders and their assets. Another reason wealth is not transferred to the next generation is that it is used to pay for expensive medical treatments and long-term care. To protect against the consumption of assets, it is important that seniors obtain adequate medical and long-term care insurance. According to MetLife, the average cost of a private room in a nursing home is $61,000 annually. If your parents are relatively young, purchasing additional disability insurance may be a good idea as well. You should also consider performing a comprehensive review of all family health-care needs so that reasonable planning can be undertaken.
Convert income into “inheritance” assets. Even if you see no inheritance coming your way, do not despair. If you have excess savings after your retirement plan contributions, you can create your own inheritance by purchasing a life insurance policy on a family elder. Even a small policy can be worthwhile because when they pass, you will receive a lump-sum, tax-free benefit just as if you inherited it. All they would have to do is agree to the policy. By converting income into assets, you can achieve an inheritance even if your family elders have few or no assets.
Embrace the concept of buying power. Often, when a small inheritance is received, saving it can be tough because you may consider it too small to have a meaningful financial impact. The concept of buying power says that every asset can have a meaningful financial impact. For example, if you inherit $30,000 and you do not embrace the concept of buying power, you may use the money to pay bills, take a vacation or buy a new car. Conversely, if you embrace the concept of buying power, you will look at the money as a down payment on a $300,000 investment property, or as an addition to your investment portfolio or as capital to launch a profit-oriented business.
Generational wealth transfer is important to the wealth of your family. Take steps today to create an inheritance if you don’t have one and, if you do, educate your family on the importance of protecting the assets that prior generations worked so hard to accumulate.
David Hinson is the founder of Wealth Management Network in New York City. Contact him at 646-375-2388, or www.wmnllc.com. E-mail: dhinson@