When music legend Prince died last year, it shocked fans around the world. And as time went on, another shock emerged: The multimillionaire had no will in place. As it turns out, this baby boomer wasn’t unique in his lack of preparation: In a recent RBC Wealth Management* survey of high-net-worth individuals, only 54 percent of respondents said they have a will. And while 26 percent said they have a full wealth transfer plan in place, a surprising 32 percent said they had done nothing to prepare yet.
These numbers become increasingly relevant as you consider that we’re on the brink of a historic transfer of wealth: As the wealthiest generation in U.S. history ages, it’s estimated that some $30 trillion will be passed to the next generation in the coming decades. So what’s the holdup in preparing for that transfer?
One reason, among many, may be that in this age of baring all on social media, there are still certain topics that aren’t discussed in polite society, and money and death are high on that list.
“For the boomer generation, you didn’t talk about money—money was generally a taboo topic—so I think that’s still playing into the culture,” says Angie O’Leary, head of wealth planning for RBC Wealth Management. “Also, when you talk about wealth transfer or estate planning, a lot of people think that’s not for them, that they don’t have that level of wealth. We try to educate that everybody has an estate, no matter how small, and everyone should have the basic documents in place and have thought through their estate plan.”
Women, in particular, need to be prepared as they are poised to receive the majority of this upcoming wealth transfer.
While the RBC study found that women are very involved in family money decisions, only 22 percent of those surveyed said they have a full wealth transfer plan in place (while 30 percent of men said the same), which clearly leaves room for improvement. Male or female, boomer or millennial, it’s important to be informed about estate planning.
HOW TO PREPARE A MEANINGFUL WEALTH TRANSFER PLAN
Think values, not just dollars.
Ultimately, wealth transfer is about more than dollars; it’s about your family legacy. What do you want that legacy to be? Think big picture, considering family values, traditions, and hopes for the future. Do you want your children to have the freedom to use the money however they please? Is there a charitable cause you feel particularly passionate about? For example, if education is a significant value, you might create 529 plans for your grandchildren. “It’s about imparting your philosophy on how best to build, protect, and preserve wealth over a lifetime,” says Thomas Sagissor, president of RBC Wealth Management-U.S. “It’s about passing along your beliefs on the role money plays in life, in your family, and in your community. In short, it’s about legacy.”
Clarifying your values and goals can also be helpful for the next generation, particularly if inheritors feel unprepared or overwhelmed. O’Leary points to the example of a client who had received a sizeable inheritance six months earlier and didn’t know what to do with it.
“She wasn’t ready to invest it, because she wanted to do something meaningful with it that honored her parents. She was almost paralyzed in her decision-making while the dollars were sitting in a checking account,” says O’Leary. “Some people, when they inherit wealth, have a hard time thinking about what they should do with that wealth, so it can be a nice touch if there is a value message given with it.”
Take stock of your situation.
Before you gift to the next generation, it’s important to feel confident you’ll have what you need for your own lifetime. RBC’s recent study found that women in particular tend to be more mindful about this. “They’re usually more benevolent but are reluctant to gift larger sums while living unless they are confident in their financial situation,” says O’Leary. “I think part of that is them understanding how much they’ll need to fund their full life, especially given that they’ll probably outlive their husbands.”
To address those concerns, Bill Ringham, vice president and director of private wealth strategies at RBC, likes to do a retirement analysis at the start of wealth transfer planning. “If you’re thinking about doing lifetime gifting on an annual exclusion basis, we’d first recommend a retirement plan with and without gifting to see how the annual gifts affect their retirement cash flow. That often frees individuals up to feel more comfortable about starting a lifetime gifting technique versus waiting until they pass away.” It’s also good to look at what kinds of assets you have—from vacation home to appreciated stocks—as all of that will come with different tax and estate intricacies.
Consider charitable giving.
Leaving a family legacy might also include gifting money away from the family itself. There are charitable giving options to fit every intention, asset, and tax consideration, from outright donations of money or appreciated stock (so you don’t have to recognize capital gains) to placing assets in a donor-advised fund to give over time, or creating a private foundation with a board of trustees and grant requests. This can also be a great way to get your children involved in conversations about family finances and values. “I love the concept of parents or grandparents creating donor-advised funds or private foundations, and then having a family meeting where kids and grandkids might be given different dollar amounts they can gift to a charity,” says Ringham. “It gives the family an opportunity to sit around the kitchen table and hear what charitable organizations are important to their family members and why.”
Decide now versus later.
Clarifying your financial picture and values will also help inform the question of how and when to gift—for example, whether you gift upon death versus set up annual gifting while you’re alive or put money in a trust for your beneficiaries to receive at certain ages when you feel they’re ready for it.
Gifting during your lifetime has both pros and cons, of course. There are tax benefits to consider, plus that already-mentioned worry that you might run out of money for your own retirement. But there’s also the emotional enjoyment you might receive from seeing your kids get a financial boost that helps them buy their first home, start a business, or plan their wedding. Gifting while you’re alive can also provide greater opportunity for mentoring. One common approach, says Ringham, is parents helping their kids set up an account with the parents’ financial advisor, who helps manage the assets the parents then start gifting. This gives the kids a chance to work with a professional advisor on the ins and outs of investing and offers parents an opportunity to see how their kids relate to the money. “Think of how much more comfortable Mom and Dad will be to leave their estate when they pass if they’ve seen how their children handle this money during their lifetime,” says Ringham.
Don’t ignore family dynamics.
There isn’t a one-size-fits-all approach to generational wealth transfer, as illustrated in another RBC study, so explore what makes sense for you and your uniquely wonderful (and perhaps occasionally maddening) family. Are there any special situations to consider? “In my case, I have a son who has Type 1 diabetes, so we want to make sure he always has access to health care or funds for his health, and that’s a different need than our other children have,” says O’Leary. “We’ve talked to our kids about how that’s something he will probably need moreso than the others.”
Or there may be complex family dynamics when it comes to passing down property that has sentimental value—like a summer home or other vacation property. “I always say the first question you should ask is whether or not your kids all have the same philosophy regarding the property,” says Ringham. “You might have three kids: one who loves it but can’t afford the upkeep, the other one can afford it but doesn’t love it, and so on.” There are different options depending on how you and your children want to relate to the property, from gifting outright to putting the property in a trust with dollars to support the maintenance of it, or setting up a qualified personal resident trust where you pick the term of years you live there before it transfers to your kids. Ultimately, you want your legacy to enhance your kids’ lives rather than create strife, and smart planning and communication can help avoid conflicts or misunderstandings down the road. “A lot of these topics are emotionally charged topics for families to work with, and having a third-party person involved can help with that,” says O’Leary
Recruit your team of experts.
Which brings us to an important point: When navigating the intricacies of wealth transfer (estate tax liability, gift tax exemptions, cost basis, and step-ups, oh my!), a knowledgeable financial advisor can come in very handy, helping you to feel more confident and fill gaps in your own knowledge. Ringham recommends taking a holistic approach so nothing gets overlooked. “Our philosophy is to make sure we’re incorporating [a client’s] team of advisors—and by that I mean their tax person, whether it’s a CPA or a tax preparer, and/or attorney,” he says. “If everyone’s on the same page, the client’s goals and objectives are met more efficiently, everyone understands what’s going on, and there are no surprises.”
Mind the generation gap.
Another important consideration is your children themselves, including when and how to talk to them about all of this. This is another time when a trusted financial advisor can be helpful, in mentoring and facilitating family meetings that might feel difficult or taboo to have on your own.
RBC’s research agrees with that, showing that the earlier financial literacy education starts in general, the more confident inheritors feel in managing what they receive. Recent research showed 66 percent of those starting before age 18 as confident in their grasp of financial matters, versus 58 percent who started between 18 and 35, and only 41 percent for those who learned later. On average, respondents said structured financial education was beginning at age 27, which points to room for growth and earlier education efforts.
Advisors suggest families start with age-appropriate lessons at different developmental points and life-stage events. For example, you can introduce basic ideas of saving-giving-spending when kids are young, talk taxes around first jobs, and delve deeper into budgeting as kids prepare for college.
With four boys, Sagissor has had plenty of personal experience with the money talk and different ways of teaching financial lessons, from allowances to opening bank accounts to using credit wisely. Through it all, he shared his own guiding financial principle—spend your money where you spend your time, aligning your assets with what matters to you.
“No matter your net worth, you can leave a financial legacy to your children, and that legacy can have an incredible impact on their financial future,” says Sagissor. “I know families who didn’t have a lot of extra money who taught their children the value of saving every penny they earned and never spending more than they have—which is creating a financial legacy. Those children didn’t inherit a dime from their parents, but they became the benefactors of something much more valuable: a solid understanding of how to be good stewards of whatever wealth they would create in their lifetimes.”
And, in the end, isn’t that what we’d all hope for?