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Baby boomers are expected to pass on trillions of dollars in wealth over the coming decades, but not everyone wants to wait until after they’re dead to do so.
So how do you know if you are in a position to pass on your wealth to future generations?
Some baby boomers previously told Business Insider that they give cash gifts to their adult children long before they pass away, because they believe the money will be most useful now, as they start families and buy homes.
Financial planners say you should inherit wealth early only if you are in a financial position to do so and if it will meet your needs.
“It’s great that parents are generous with their kids, but they also need to be smart about the decisions they make for their kids,” Michelle Griffiths, senior wealth advisor at Citi Personal Wealth Management, told Business Insider.
Griffith said there are a number of reasons people might want to transfer wealth early — for the ultra-wealthy, it might be to avoid hefty inheritance taxes — but even the average baby boomer with a net worth of about $1 million is participating in early wealth transfers.
“They want to share their wealth and they want to see the transfer of wealth while they are alive and healthy,” she said, adding that the main reason her clients want to share their wealth with their children is “simply because it makes them happy.”
Griffiths said financial planning is especially important for parents considering distributing assets, in part because many parents find it hard to say “no” to their children when they need help, so it’s best to build gift-giving into the financial plan from the start.
Have your finances passed the “stress test”?
Griffiths said the first thing to do before transferring assets is to review your retirement assets and carry out what’s known as a “stress test.”
“Stress testing is looking at the portfolio, modeling it in a volatile market and looking at the impact of normal distributions to meet their needs and the actual bottom line,” she said. “Then I add in what I think of as target distributions, which are things that are not the most important to their livelihood but that they really, really want to do.”
This includes considering what your portfolio will look like when markets are at their most volatile and declining.
“If the portfolio survives that and still sees positive results at the end of the day, then we can model some sort of reasonable schedule for sharing some of the assets,” she said.
Griffith said this strategy allows parents to work backwards to determine the amount they feel they can give to their children. While parents may want to give the full tax-free gift amount ($18,000 per person in 2024, or $36,000 for married couples), it may not be the right amount based on the parents’ assets, given a potential economic downturn.
“Stress testing your portfolio is a way to make informed decisions,” she says. “Use your head as well as your heart to make smart decisions.”
Griffiths said wealth advisers can help complete stress tests using specific software that looks at different simulations of what would happen to an individual’s finances. Average Net Worth Range She said their generation had average savings of between $970,000 and $1.2 million in 2019, and financial planning is offered at no extra cost.
One key point Griffith emphasized is that one thing to think about before gifting assets is end-of-life care. Nursing homes and assisted living facilities can cost as much as $100,000 a year. Because people are living longer than ever before, some baby boomers may end up living in a nursing home for 10 or more years, not just three or four.
“That’s one way to really start depleting your portfolio,” she said, adding that when stress testing, it’s also important to model what would happen if your health deteriorated and you needed long-term care.
Griffith said his favorite part of meeting with clients is when they come in and say, “I want to give this much money to my child,” or “I want to help my child make a big purchase.”
“They’re happy to do it and I’m excited to work with them,” she said, “but again, we want to make sure it’s a smart choice, it’s an affordable choice and it’s not just for the period they’re asking for. We have to look beyond that.”
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