Pam Lucina, president of The Northern Trust Institute and leader of Northern Trust’s national practice for ultra-high-net-worth families, discusses the great wealth transfer and how some families are navigating it successfully.
What can women do at this time to prepare for the wealth transfer?
Women are poised to inherit a significant portion of wealth due to their life expectancy. Women live an average of six years longer than men, and they are expected to make up about 70% of future centenarians. Women need to take time now to better understand all aspects of their wealth; so if they must navigate the unexpected alone, they are prepared to take control and make important financial decisions, whether they concern their health or lifestyle in retirement. This will ensure they have a strong financial foundation before considering how much wealth they can pass on to the next generation.
Equally important is equipping all inheritors with the financial knowledge they need. Families should consider attending financial literacy workshops together or working with a financial adviser to become educated in responsible wealth management. We aim to foster financial acumen across entire families and work closely with rising-generation inheritors, which increases their chances of a smooth transition and wise decision-making with inherited wealth.
What are people missing when it comes to preparing for the wealth transfer?
Open and transparent communication is often the missing piece in wealth transfer planning. Traditionally, estate plans were shrouded in secrecy, often leaving inheritors confused and hurt upon hearing about the plan for the first time after the family member has passed. Sometimes assets left in a trust, with intentions of providing tax and creditor protection, can be interpreted as “my parent didn’t trust me.”
Discussing the “why” behind the plan, including specific goals or considerations, fosters mutual respect and understanding. By involving the rising generation in discussions about the wealth transfer, you allow them to voice their perspective and avoid the assumptions, and sometimes guilt, which come with inheriting funds they did not create. This way, families can ease anxieties and ensure a much smoother transition for everyone.
What is an example of a family that is doing it right?
I’m currently working with a family that is taking a proactive approach to their wealth transfer. Instead of secrecy, they are setting aside time to have open conversations with all members. The parents are learning alongside their children about financial literacy and the steps involved in managing an inheritance. They attend our financial essential programs together, where discussions include how to best care for the parents if one outlives the other.
The family is also using lifetime gifting to provide opportunities for joint decision-making. For example, the parents gave a sizable amount to a donor-advised fund and gave each of the two children control over each portion and allocated a third amount where the family, as unit, is required to agree on the investment strategy and the grant recipient. This is all a great trial run as to how the assets will be managed after the parents pass away.
We’ve been talking about this great wealth transfer for so long, is there any possibility that, given the big tax reform next year, it could be more of a trickle?
On the contrary, we see more families get ahead of the possible tax reform by accelerating gifting, as they plan and prepare for all possible outcomes. The current high lifetime exemption ($13.61 million per person in 2024) is set to be cut in half at the end of 2025. This means people have a limited window to transfer wealth tax-free. If they can afford large gifts and gifting aligns with their goals, families are accelerating wealth transfer.
There are also nontax reasons for giving while you are living. Life expectancy is increasing, and there are more centenarians today than ever before. As a result, inheritances are coming later and later. Many of our clients are deciding they don’t want to wait until their children are 60 years old to transfer wealth. They are realizing they want to see their family members enjoy these funds when they can really use them, and it can be done with their helpful guidance.
So, the combination of a shrinking tax-free window and nontax motivations seems to be leading to an accelerated wealth transfer, not a trickle.
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> What you may not know about the great wealth transfer | Crain Currency