The Great Wealth Transfer: Considerations for an Inheritance

You may have heard of the Great Wealth Transfer, a term coined in the finance world that highlights the $84T (that’s trillion, with a T) that is estimated to be passed from the older generations (mainly Baby Boomers) onto other generations (mainly Millennials and Gen Xers) here in the US, through the next two decades. That’s a LOT of money coming down the generational pipeline - though if you’re expecting an inheritance of some sort, do you know what that might look like for you?

Building some understanding about the general idea of an inheritance is what I see as the ideal first step in navigating an inheritance coming your way, be it large or small. So, here are some considerations that just might make the process a bit easier to handle:

The amount of inheritance might be lower than expected

• The estimated median inheritance is approximately $69,000, which isn’t unwelcome, but also is not necessarily life-changing (as might be assumed by the term inheritance.

• Multiple heirs means a greater spread of inheritance, and inheritances won’t always simply pass to the children - it’s common to see assets passed to siblings, grandchildren, and other extended family members, friends, or even societies of which the decedent is a member.

• Increasing life expectancy equals more time spent spending one’s assets, and with the average cost of living for those 85 years old and beyond (all things considered, such as independent living facilities) being upwards of $80k per year, assets can be depleted rather quickly, and deteriorating health might mean even further costs accrued in the healthcare system, such as hospice.

External forces might erode the value of the inheritance being passed on

• Inflation has proven in recent years to be detrimental to the value of one’s dollars. As an example, the purchasing power of $100k in 2020 would now be equivalent to $124k in 2025. Coupled with the likely conservative investment strategy of an older individual, aimed at capital preservation instead of growth, the value of the inheritance might certainly represent far less purchasing power once passed on to the next generation.

• Taxation at the federal level might not be a large threat (federal estate tax exemption of assets under $14M), though state-level estate and inheritance taxes can erode the value of the inheritance being passed on substantially. Check with your advisor and tax professional how your specific states tax estates and inheritances, but estate taxes reach levels of 12-20% in some states, and inheritance taxes can be between 12-16% (and Maryland imposes duel taxes, both estate tax (on the decedent) and inheritance tax (on the heir)).

• If the inheritance received isn’t cash, but instead is stocks, real estate, or other alternative investments, the heir might be surprised to owe taxes when the asset is sold to cash, even with a stepped-up cost basis at the time of death.

Timing of the inheritance might require adjustment of expectations

• Healthier lifestyles and increases in medical technology and care have led to longer lives. Cost of a longer life is mentioned above, but the timing in which assets are passed onto heirs is the other side of that coin. Longer time with a loved one is certainly priceless, though one should tailor expectations on when they might expect that inheritance and how that inheritance might be of use in their own life.

  • *This is where I encourage conversation between my clients and their heirs to consider if there might be an optimal period in which they pass on an inheritance that might be before their passing, aligning better with the heir’s financial needs in life. Receiving $75k in one’s 30s might be more impactful than receiving a greater amount at a later stage when financial struggles are less or nonexistent.

• If the inheritance process is not planned ahead of time (by using an estate planning attorney, and a will or trust), the lengthy probate process of the legal system might painfully delay the receipt of an inheritance by an heir.

Inheritances can be complex and time-consuming to manage

• Probate process aside, there’s taxation of inherited assets to consider (talked about above), in which a financial advisor and/or a tax professional might be critical teammates to bring in to navigate the receipt and management of, to avoid any costly mistakes

• Cash inheritances are the simplest to receive, though many receive real estate, stocks, bonds, or other alternative investments, perhaps even stake in business ownerships. Some assets might be continued to be held, while others might be liquidated to cash, a process in which can take time, and/or reveal complexities. An estate planning attorney as another potential teammate could give you a stronger foundation for navigating this process.

How can you prepare now for an inheritance at an unknown time in the future?

1. Communication is key. While the one passing the assets on might prefer a sense of privacy, even amongst their own family, communication can set expectations for all parties, which will potentially reduce the emotion in an already-emotional (and painful) stage of life.

2. Define and inventory the assets to be passed on. An estate planning attorney and a trust are often used as tools in this process, and while there is certainly a cost for this, the cost of not having a plan and any foresight could potentially be far greater. I see this as the most critical aspect to the process of passing on an inheritance.

3. Define the list of heirs, and begin outlining who might receive what assets. And back to the first point, folding the heirs into the process with communication sets expectations better for all parties.

4. Help the heirs establish the appropriate framework to receive assets, and manage those assets moving forward, even after the passing of the decedent. A financial advisor might help establish investment trust accounts, Inherited IRAs, or brokerage accounts to receive, liquidate, and reallocate assets into more suitable investments to continue letting that money serve the next generation.

These are certainly not all the considerations, and the process of passing assets onto the next generation can be very complex and time consuming. If you expect this to be a relevant topic in your life, start the process sooner rather than later. Build a team of professionals that can help support the transition of a life stage like this.

Want to talk further about some of these aspects of inheritance? This is an area we excel in at Granite Wealth Management. Reach out to me today, and let’s start the conversation and build your framework for success: [email protected].

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