I'm a Wealth Planner: These 3 Steps Can See You and Your Heirs Through a Wealth Transfer

The Baby Boomer generation is currently the largest holder of assets — but not for long.

There's about to be a period in which the largest wealth transfer in history takes place, called the Great Wealth Transfer.

By 2048, an estimated $124 trillion, according to Cerulli Associates, is expected to be passed down from Boomers to younger generations.

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How do you deal with assets that high when transferring them to heirs and receiving them as an heir?

It's a complex situation in which there's no cookie-cutter approach, but there are things to know about transferring wealth that could help you understand how to best position yourself to receive that money, how it could affect your financial situation and, ultimately, how to weave it into your financial plan.

How to approach the transfer of ownership of assets

The reality is that not everyone wants their children to know about their financial situation or their distribution of assets in the same way.

Many of those fears are for good reason. Studies show that 70% of families lose their wealth by the second generation, and an astonishing 90% lose it by the third generation.

A variety of factors can contribute to this, including taxes, frivolous spending and a lack of understanding of how to handle transferred assets.

For example, if you inherit an IRA, you might think you must pay all taxes on the account now instead of stretching it over 10 years, as the rules currently state.

Instead, you can apply strategies to better utilize or combine that money to allow yourself to retire earlier than you thought possible.

In some cases, an effective wealth transfer can even accelerate a retirement timeline. You might be able to strategically use some rules that enable you to liquidate assets to bridge that gap.

For example, let's say you're in a position to retire early at age 54, but you can't touch your 401(k) without penalty until age 59½, whereas if you worked until age 55, you can, thanks to the so-called Rule of 55. If you inherit assets, it could free you to avoid touching those retirement assets.

Take the funds that you're forced to take from an inheritance to bridge the gap until you get to a point where you can access retirement money.

Otherwise, you'd have had to work five more years just to be able to access what you put into a retirement plan. Here are the three steps that can help to see you and your heirs through a transfer of wealth:

Step 1: Know what you're inheriting and what buckets you receive

The first step is knowing what you're inheriting and what buckets you've received. Sometimes when people inherit money, they think they're going to have a huge tax burden.

But most of the time, if you do it strategically, you won't have a lot of taxes due at one time, based on the current rules on a stepped-up cost basis.

If you inherit a home and sell it immediately, there shouldn't be any taxes. The same is true if you inherit a stock portfolio. The tax basis will update to the date-of-death value.

Depending on the process, you can have a bucket in which assets aren't taxable but available to do such things as help you pay off your mortgage, lowering the amount of money you need monthly. This could put you in a window in which retirement is a possibility.

When it comes to retirement, you must think about your cash flow and how you fill that bucket. What's going to be available for emergencies? What kind of growth vehicle am I going to need for inflation? Depending on what you inherit, that could fill a bucket that you don't currently have today.

If it's a situation in which you feel good about your pension and Social Security income but don't have enough flexibility for emergencies, maybe those assets will bridge that gap. You could have a great situation today, but you are worried about longevity. You could position assets for long-term growth potential.

It's about trying to figure out how to weave that strategy into what you're already doing, because we tell people inherited money is a lot like lottery money.

If you don't know you're going to get it or what you plan to do with it, the money tends to disappear very quickly.

Make sure you're strategic to a point, but don't count money before you have it. I think everybody would like their parents to finish well and have enough money for long-term care and other things that could put a dent in the expected inheritance that you get, especially if you're dividing it between siblings.

Never make tactical decisions before you have money, but it's good to make strategic planning choices or have awareness so you're prepared when you do receive assets.

Step 2: Be as efficient as possible

If you want to transfer wealth as efficiently as possible, there are several actionable steps to make sure your assets are accurate and structured according to your preference.

This will ensure as many of your assets go through beneficiary designations as possible and you aren't waiting on a probate timeline, which helps reduce the risk of someone thinking they're entitled to money they aren't.

Have basic estate planning documents in place so you can end your life well, but also make sure anything that doesn't have a beneficiary's name attached to it is dealt with appropriately.

This time is also about education and having conversations with your children so they're not blindsided. Leave your heirs with a plan, not a puzzle. Determine who needs to have a voice in the conversation and who needs to have a vote in the conversation.

If you want to handle the wealth-transfer process right, communication is key with the next generation.

For example, let's say you have three siblings; two are in good financial shape, but the third has hit hard times. Logically, it would make sense to shift more of the estate in their favor.

But if there's no communication and they see the documents, they might think their parents loved that sibling more than them.

People attach a lot of psychology to money decisions, especially later in life. The more communication you have and get buy-in from the kids, the better it will be for everyone. Don't ruin your legacy through a lack of communication.

Step 3: Be strategic in your gifting

In the same way the recipient must be strategic in how they receive money, parents should be strategic in how they give or leave money.

If they're in a position in which they're financially able, they could gift funds annually while still living, passing money to their heirs that doesn't have the same restrictions or taxation.

Remember to think about the tax buckets. For example, suppose half your money is in a house and the other half is in a retirement account. You want half your money to go to charity and the other half to your kids.

In this case, you'd want to gift the house to the kids, because they would get more and the charity would get more if you gift the entire retirement account.

It might sound simple, but if you switch those, the whole estate is going to be smaller and less impactful simply because you didn't gift from the right bucket to the right places. Strategy matters.

This could make Roth conversions more valuable because inherited Roth funds are the only funds you can receive that have a tax-free life after the person who funded the Roth.

Try to use that as motivation to say, "If I know I'm never going to use that money and I want to try and maximize its impact, then maybe it makes sense for me to start paying taxes on this money for the benefit of kids or grandkids to be able to have a tax-free runway."

Some clients I work with recognize the impact of Roth conversions on their situation, but when I ask about their parents, they tell me they're 89 years old, living on Social Security and are forced to take money out every year.

Because of that, their total income is probably not a lot, especially compared with their heirs.

Could it make sense for the parents to convert so that the money the children receive will then be able to grow tax-free during their lifetime and retirement years?

It's easy to get into your upper 80s and not realize how beneficial a Roth conversion is when you're just pulling whatever the government makes you take out since required minimum distributions (RMDs) started for you almost 20 years ago.

It's about being strategic with what you want to have happen and how you can leverage the decisions that you can make today and maximize the impact.

Related Content

• This Is How You Can Guide Your Heirs Through the Great Wealth Transfer
• You've Built Your Wealth, Now Make Sure Your Family Keeps It
• Great Wealth Transfer: How Families Can Get on the Same Page
• Wealth Transfer Is About More Than Just Money
• Six Ways to Make Talking With Family About Estate Planning Easier