Family Feuds (and How to Avoid Them)
By Jay Lee | Co-Author: Riddhi Panchal
Economists and social scientists have been clamoring for years about the demographic tidal wave set to occur as the largest and wealthiest generation in US history (Baby Boomers) begin to age out of the population. One by-product of this inevitable trend is the transfer of an enormous amount of wealth to the next cohort of Americans – and the numbers are staggering.
Over the next twenty years, it’s expected that over $170T1 of wealth will be in motion. The Silent Generation and Baby Boomers, born between 1925-19642, have benefited from a 40-year rally in stock, housing and asset prices and are expected to pass on $73T3 to their heirs – for context, the total value of US equities is only $46T 4 today. An additional $48T1 will be moved as these groups transition their illiquid and liquid assets (like small businesses or 401ks), and GenXers/Millennials will earn and add $50T1 in wealth, leading to additional savings in retirement. This secular trend of wealth movement and creation, known as the “Great Wealth Transfer,” will propel Millennials and GenXers to becoming the richest generation in American history – leading to increased consumer spending, investments, and, hopefully, economic growth.
While this influx provides tailwinds for the wealth management industry, it also introduces a host of new challenges. Traditional wealth managers have struggled to connect with a younger audience, largely because they’ve never needed to. After all, the purse strings were quite literally in Mom and Dad’s hands. While some firms try to brand themselves as “not your father’s advisor,” studies show that 80%5 of heirs do not plan on using the same financial advisors as their parents. Newer generations are fluent with technology in a way that the Baby Boomers/Silent Generation haven’t been, emphasizing digital engagement, personalization, and data-driven decision-making.
Additionally, there is growing interest in alternative assets, including real estate, private equity and private credit (plus, remember cryptocurrency?) – historically a luxury only the wealthiest could afford. With these changes, wealth management firms will have to adopt a more proactive and engaging approach and expand their investment strategies to retain incoming generations as clients. TLDR, advisors have their work cut out for them.
One fundamental element of the wealth transfer process that we see coming front and center in the pending years is estate planning. An estate plan consists of the instructions that families and individuals set to specify how their assets will be distributed to their loved ones after their death, typically utilizing a will or trust. We’ve seen over the years many public examples of estate battles gone wrong, ranging from the Redstones and Viacom/CBS (allegedly the inspiration for the Roy family in HBO’s Succession) to the Queen of Soul, Aretha Franklin. Without an estate plan, it is estimated that anywhere from 3-8%6 of the estate’s value is lost to probate. And while most inheritances will be slightly more modest than the Redstones or the Roys, ~70%7 of Americans do not have a proper estate plan in place despite the potential financial impact.
As the financial and legal bridge between the older generation and the new, it happens to be an opportune time for advisors to demonstrate their value while engaging with their client’s heirs (the soon-to-be wealthy). To better understand this, let’s break down the complexities associated with estate planning that have historically deterred Americans and how modern solutions and technology are addressing this:
▪ Complexity: The financials of the modern family can be complex (e.g., blended family dynamics, disparate financial accounts, illiquid alts) and require continuous management of assets, legal entities, and multiple beneficiaries. Moreover, tracking those assets as they change can be cumbersome and create lost opportunities. Modern estate planning solutions provide advisors with comprehensive estate visualization and beneficiary summary tools to maximize transparency.
▪ Tax planning: Tax laws surrounding inheritance are intricate and dynamic. For example, direct descendants may pay one rate while other beneficiaries may pay a higher rate (ranging from 1% to 18%8). Different strategies, such as the gift exclusion (up to $17,000 per year per individual or $34,0008 for a couple) or making direct payments to medical providers or educational institutions (unlimited), can optimize the effective taxes paid. The gifting of derivatives on a private business provides the opportunity to move assets into a trust while still utilizing the lifetime exemption ($12.92m9 per individual in 2023, but slated to drop to $5m10 in 2025 – a perfect call to action). Modern tax planning solutions are automating time-consuming workflows by providing the ability to read tax returns in seconds and generate instant scenario analyses and actionable insights to help beneficiaries minimize or avoid unnecessary inheritance taxes in the long run.
▪ User experience: Over 60% of Millennials want a mobile platform that connects them to their advisor vs just ~30% of their older counterparts11. The continued digitization of client interactions means financial advisors must offer better tools and channels to engage with the newer generation. While tech in this space is nascent, there is a significant opportunity here for providers to augment the capabilities of financial advisors. Furthermore, tools like estate visualization maps and consolidated analytics allow financial advisors to view and track portfolios against various internal and external benchmarks.
▪ Affordability: A comprehensive living trust plan, including attorney fees, can cost upwards of $1,50012 depending on the complexity of the assets. Modern estate planning solutions allow users to create detailed plans digitally at a fraction of that cost and help users avoid costly probate fees.
All in all, the Great Wealth Transfer is happening right now, and we at Centana are excited to see how this transforms the industry. For founders building in this space, if our thesis resonates with your mission, we’d love to connect!
12023 Tiburon Keynote
2 https://www.purdueglobal.edu/education-partnerships/generational-workforce-differences-infographic/
3 https://www.cerulli.com/press-releases/cerulli-anticipates-84-trillion-in-wealth-transfers-through-2045
4 https://siblisresearch.com/data/us-stock-market-value/
5 https://www.cnbc.com/2019/10/21/what-the-68-trillion-great-wealth-transfer-means-for-advisors.html
6 https://www.empathy.com/probate/when-is-full-probate-necessary
7 https://www.cnbc.com/2022/04/11/67percent-of-americans-have-no-estate-plan-heres-how-to-get-started-on-one.html
8 https://personal.vanguard.com/pdf/a129.pdf?2210080142#:~:text=Inheritance%20taxes,may%20pay%20a%20higher%20rate
9 https://www.lbmc.com/blog/gift-estate-tax-changes/
10 https://www.kiplinger.com/taxes/lifetime-estate-and-gift-tax-exemption-kiplinger-tax-letter#:~:text=The%20lifetime%20estate%20and%20gift%20tax%20exemption%20for%202023%20deaths,Congress%20after%20the%202024%20election
11 https://www.unqork.com/resources/blog-articles/how-wealth-management-firms-should-prepare-for-the-great-wealth-transfer
12 https://www.nafsbenefits.com/learning-center/how-much-does-a-living-trust-cost/#:~:text=According%20to%20numerous%20sources%2C%20the,the%20same%20type%20of%20documents
