Transferring wealth from one generation to the next is a natural occurrence. But as the Baby Boomer generation prepares to pass their wealth to their heirs — or causes they support — trillions of dollars are set to change hands.

For families involved with this historic transfer, understanding the nuances of what’s referred to in the media as “The Great Wealth Transfer” can prove helpful. For wealthy families in particular, a shift in generational wealth distribution may require an awareness of the tax implications and tailored considerations for each family member.

From the tax landscape and essential planning strategies, let’s look at this unprecedented transfer and how different generations can start preparing for it.

Understanding The Great Wealth Transfer

The Great Wealth Transfer refers to the massive intergenerational transfer of assets from aging Baby Boomers to their heirs, mostly Gen X and Millennials. However, there are implications for Gen Z and Gen Alpha as well.

To give you a sense of scale, multiple press reports have described an anticipated shift¹ of $84 trillion in assets between 2023 and 2045. This transfer can significantly impact estate and gift taxes, prompting many to plan carefully if they hope to reduce tax liabilities and preserve assets.

Before we look at what each generation needs to know, let’s first review some broader issues and key terms.

Tax implications of wealth transfer

There’s nothing especially new about the idea of utilizing estate planning to navigate taxes. Of course, the more money, land, stocks and so forth that one owns, the more complicated the process can become. And that’s a major factor in people deciding to work alongside tax, legal and financial advisors to craft an estate plan.

Estate taxes: Thresholds and exemptions

Understanding the thresholds and exemptions that govern estate taxes can help you build an estate plan strategy that both can help reduce tax burdens and help asset preservation. Depending upon the particulars of your assets and the current relationship with your heirs, you may wish to consider the “giving while living” philosophy² and potentially take advantage of exemptions during your lifetime.

If that’s the case, then it’s worth noting that the 2017 Tax Cuts and Jobs Act (TCJA)³ increased the annual gift and estate tax exemption. Individuals may transfer up to $13.61 million — or $27.22 million for married couples if they combine their exemptions — in assets during their lifetime or through their estate without incurring federal gift or estate taxes.

» Insights: The TCJA’s annual gift and estate tax exemption’s increase is temporary and is set to expire at the end of 2025, making now a good time to take advantage of the aforementioned “giving while living” strategy.

Gift taxes: Strategies

Navigating gift taxes might mean employing strategic gifting to help reduce tax liabilities. Leveraging annual gift exclusions, utilizing trusts or adopting gifting strategies can help reduce tax consequences. For 2024, the annual gift tax exclusion is $18,000 per recipient or $36,000 for married couples who choose gift splitting.

Capital gains tax and appreciated assets

Transferring appreciated assets may trigger capital gains tax. Employing strategies like a step-up in basis — the adjustment in the cost basis of inherited assets to its fair market value when inherited — or charitable giving can reduce the impact of capital gains tax on inherited assets.

Income tax for beneficiaries

Beneficiaries inheriting assets may encounter income tax implications, especially concerning retirement accounts or investments. Understanding these implications helps in devising tax efficiency strategies for each party involved in the wealth transfer.

Generational considerations for The Great Wealth Transfer

Obviously, earlier generations have dealt with many similar issues, but the increasing complexity in the tax code, legal regulations and the sheer volume of money that will be transferred in the next two decades may warrant special consideration.

Baby Boomers

Updating estate plans and employing strategies to help reduce tax implications are the priorities for many people in this generation. How can you effectively manage the transfer in a way that preserves the assets? Understanding the intricacies of gifting strategies can significantly impact the wealth transfer process and tax efficiency — and potentially help preserve the wealth you’ve worked to accumulate.

Steps you may wish to take that might assist with the transfer include:

• Estate planning strategies
  Comprehensive estate planning may involve a variety of legal documents (e.g., wills, trusts, a health care directive, durable power of attorney) and probate avoidance to help preserve assets and expedite the transfer process. Consider engaging family members in this process for transparency and to help reduce disputes.
  
  
• Tax-efficient asset transfers
  There are a variety of mechanisms, including trusts, which can help optimize asset transfer while lessening tax exposure. A knowledgeable accountant or tax attorney can help.
  
  
• Financial and investment planning
  Diversification, risk management and leveraging tax-advantaged accounts are strategies that can help you preserve wealth as you look ahead to its transfer. A financial advisor — particularly one well-versed in wealth management and asset transfer techniques — may be of assistance here.

» Insights: One topic that arguably receives too little attention in The Great Wealth Transfer articles? The need to anticipate and plan for end-of-life health care. Would you be prepared to cover costs related to the long-term mental or physical incapacity of yourself or your spouse? As you advance in age, it’s worth a conversation about strategies (e.g., long-term care insurance) with your financial advisor.

Gen X

As transfer recipients, Gen X — those born 1965 to 1980 — may wish to consider how to manage their soon-to-be inherited wealth so that it’s preserved, at least in part, for others.

But this is more than a financial concern. It can also be a family matter. Communicate with your elders and honestly discuss wealth transfer. Exploring tax benefits that may be available through estate planning and comprehensive financial reviews can prove integral to preserving a family legacy. Understand your new assets and take steps to prepare.⁴

Balancing retirement planning with inheritance strategies can be top of mind for Gen X individuals, so keep a few things in mind:

• Look to experts — including an attorney, CPA and a financial advisor — to develop your own investment strategy and learn how to navigate the tax implications of the assets you’re inheriting.
• Factor your inheritance into your individual financial goals. Consider how an inheritance might impact your retirement plans. Or, if you own a business, what might be the pros and cons to infusing your existing company with cash? Might your inherited wealth open the door to work-optional living for you and your spouse? These are complicated questions that may merit a conversation with an attorney, CPA or wealth management team.
• Consider updating your own estate plan⁵ so that you’re better prepared to transfer the wealth that has just been transferred to you. For instance, you may want to explore the possibility of putting a trust in place.

» Insights: As with the Baby Boomers, making provisions now for possible long-term care scenarios may help reduce the need for a Gen X-er to deplete inherited or existing assets. Working with a financial advisor, you may be able to identify options beyond those available through your employer.

Millennials

Enhancing financial literacy, leveraging technology for management and engaging in conversations about wealth transfer are vital for this tech-savvy generation born 1981 – 1996.

If you’re the recipient of substantial assets, understanding your new assets and developing a plan that preserves the wealth to meet your financial needs now and in the future can prove beneficial.

Taking steps to shore up your financial literacy and personal finances now can help prepare for future inheritance. While a wealth of financial and investment information is available online, you may wish to consult with a financial advisor regarding tax efficiency strategies.

» Insights: Although many Millennial parents still have very young children at home, the anticipated or recent inheritance of substantial assets might make it a good time to explore what strategies may benefit your children later. From planning for education to establishing trusts for a child with special needs, a financial advisor may be able to offer ideas and strategies for your consideration.

Gen Z, Gen Alpha (and beyond)

Encouraging early savings and investment, understanding essential estate planning and promoting financial literacy through education can prove pivotal for younger generations born 1997 – 2012 (Gen Z) and 2010 – 2024 (Gen Alpha).

Of course, many of people from these two generations are still minors, which means that their parents and families may wish to be involved closely in discussions surrounding potential inheritance.

In preparation, what can be done to manage the wealth and help it grow to preserve their inherited legacy? Openly discussing finances and estate planning can help younger family members become more proactive and successful in their investment strategies.

» Insights: Older members of the Gen Z cohort may find it beneficial to become more familiar with basic asset management and investment terminology. Like their older Millennial siblings, they may benefit from getting to know the family’s wealth management team or even hiring their own financial advisor.

The takeaway

As wealth passes from generation to generation through The Great Wealth Transfer, being equipped with knowledge and comprehensive strategies can help everyone feel more confident about the process and next steps.

By understanding your distinct financial needs and goals, RBFCU Wealth Management, The Garner Davis Group can help you create a plan that works for you and your family.