The great wealth transfer is upon us.
An estimated $84 trillion to $124 trillion is expected to go from baby boomers to Gen Xers, millennials and Gen Z over the next 20 years or so, notes David Mammina, partner and financial advisor for Coastline Wealth Management.
With these numbers and factors in mind, a reputable estate attorney, CPA and financial planner can help manage that transfer of wealth.
“The team can really look at what’s the best way to deploy trusts. The CPA can determine the best way to save on taxes,” said Mammina, adding that a financial planner can help clients determine how much can be gifted.
Advisors can tailor a program to an individual’s desires: Whether they want to set up philanthropic donor trusts, gift early so they can see the next generation enjoy it, or invest so there’s a bigger pot for their heirs to inherit.
“It really depends on the person themselves on how they want to determine how their money goes when they pass,” Mammina said.
Financial planners will bring in estate attorneys to set up trusts, which helps expediate the transfer of assets. Accountants can start converting IRAs and 401Ks into Roth IRAs, so the assets grow and transfer to the next generation, tax free.
Teaching the next generation about investing, compounding interest, diversification and risk is also key.
“It just makes it a little bit of an easier transition when everybody is part of the picture,” Mammina said.
Focus on income taxes
As baby boomers age, wealth management starts to center on helping younger generations become good stewards of these resources, notes Ashley Weeks, a wealth strategist at TD Bank.
“How do we pass the wealth along with the least amount of friction and protect ‘kids‘ going forward?,” said Weeks, noting that the focus should be on income taxes on retirement accounts.
Instead of selling an asset, you can borrow against it, using it as collateral.
“You don’t have to pay tax when you take out a loan and let that property benefit from the step up in basis at death,” she said.
There are challenges in passing along retirement accounts, which don’t get the benefit of a step-up in basis. One possibility is to convert an IRA into a tax-free Roth account.
“You can pay tax now, but your heirs are not going to be forced to pay taxes on that money when they pull it out after they inherit it,” Weeks added.
A revokable trust allows assets to bypass the probate process and help protect assets from heirs’ spouses, in the event of divorce.
To prevent disputes between heirs, grantors should choose their trustees wisely.
“Very often, it makes sense to involve a professional. It could be a lawyer that serves as trustee. It could be an accountant, a bank or financial institution,” she said.
Diversify your portfolio
For family business owners, their company is typically their largest asset and the one that’s most dear to them, notes Bhakti Shah, partner and chair of PKF O’Connor Davies’ trusts and estate division.
If they have concentrated risk in that business, one strategy would be to diversify.
“Diversify by maybe selling some shares outright to create a more mixed allocation in their asset portfolio,” Shah said.
If selling is not an option, gifting–either in outright gifts or in a trust—is another possibility.
Irrevocable trusts provide a greater layer of protection than outright gifts: The asset is protected from creditors or former spouses.
Work with a team of trusted advisors: An accountant to ensure assets are properly transferred; a lawyer, for a trust, which is a legal entity; and a financial advisor, to manage the transfer of assets.
“That whole team of professionals is working for you to make sure they’re looking at it from all different angles so that your wishes are being handled according to plan,” Shah said.
For business owners, having a plan that defines the transition and ownership will put you ahead of the game.
“It’s important to have an independent valuation to understand what the business is worth,” said Shah, who adds that it could help determine their options as they transition out of the business.
Keeping the peace
For business succession planning, founders must decide how involved they want to remain with the business. In instances when they’re closely linked to their companies, founders usually get a higher payout if they stick around for a year or longer before transitioning out, notes David Frisch, founder and CEO of Frisch Financial Group.
“The first step—before the family gets involved—is having the conversation with the owner to say, ‘What do you want to do?” Frisch said.
There’s also the question of how to divide all major assets between the children: the business, real estate holdings and the brokerage account.
“The founder has to understand the tax consequence of selling,” said Frisch, adding, “Then you start bringing the family in.”
In addition to a financial advisor and attorney, you might want to also bring in a psychologist to handle the emotional issues of who gets what, who becomes the boss, etc.
“If nobody wants to run it, it’s certainly easier to sell to a third party, because it takes a lot away from the potential fighting that may be involved,” Frisch said.
He advises that founders should plan well ahead of retiring: “Five years before is typically when the founder should start thinking about the next chapter.”
ARLENE GROSS, LIBN CONTRIBUTING WRITER
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