Key Takeaways:
- In what has been called the Great Wealth Transfer, approximately $84 trillion of wealth will shift from Baby Boomers to individuals in the Gen X and Millennial generations in the next 25 years.1
- This transition will completely reshape the wealth management landscape.
- As families grapple with how to sustain wealth and position future generations for financial health, the conversation becomes a complex balancing act.
A Shifting Approach to Handling Large Inheritances
In some cases, wealthy individuals are choosing to reduce the inheritance they pass to future generations to promote long-term financial health. A Financial Times report explained that many wealthy households are rethinking their inheritance strategies.2 This decision is sometimes fueled by parents who want their children to earn their own wealth, and so to preserve wealth they focus on their children’s education and support for some basic living expenses but avoid leaving huge sums of money in an inheritance. This strategy is designed to promote long-term financial health by encouraging the next generation to develop their own careers and sources of wealth, while still providing a safety net.
In other cases, Financial Times explained that individuals who inherit large sums of money are choosing to donate significant portions of their inheritance, sometimes out of feelings of guilt or embarrassment. Indeed, attitudes about inheriting money are changing. The potential negative implications of leaving individuals with huge quantities of wealth are more apparent. In fact, a Fast Company® report explained that about 70% of wealthy families will lose their wealth by just the second generation.3 By the next generation, 90% will have lost their wealth.
A large inheritance is not a sure path to long-term financial health. Instead, wealth preservation strategies are vital in promoting positive fiscal behaviors and positioning a family to retain wealth over multiple generations.
Considering Wealth Preservation Across Generations
A wealth preservation plan is not just about the next generation. It is a matter of blending investment strategy, alternative investments, real estate and trusts to carefully manage wealth over an extended period of time. Working with an estate planning and wealth management team can position you to balance your wealth preservation strategy to protect your wealth beyond the first generation. This can prove incredibly important to ensuring the next generation does not squander your wealth or, decide on your behalf, not to pass it to the following generation. Whether you want to take care of your grandchildren or simply protect specific assets to keep in the family over time, wealth preservation can help you do so.
Clear, open communication with your loved ones is key in preserving your wealth. Even if some of the differences across generations within a family are insurmountable, having open financial conversations can bring future generations to the table.
While thorough wealth and estate planning are critical to sustaining wealth beyond the first generation, there are also a few less tangible issues you will need to consider. In particular, any effort to preserve wealth will be undermined if the people you want to inherit have highly disparate views about wealth compared with your own and are unwilling to comply with your wishes. Clear, open communication with your loved ones is key in preserving your wealth. Even if some of the differences across generations within a family are insurmountable, having open financial conversations can bring future generations to the table, helping you understand their plans and adjusting your strategies accordingly. In many ways, wealth preservation can push wealthy households to revisit basic family finance management skills. This is especially relevant if you are concerned about a family member immediately spending large sums of money when he or she receives an inheritance.
There is a great deal to consider when making wealth preservation plans. Having a wealth management and legal team in place to help guide you can be invaluable. These experts can provide insights that help you align your estate and investment strategies with your goals and objectives. Comerica’s Wealth Management team can help you on this journey. Contact your Relationship Manager or request to speak with a Comerica Wealth Planner today.
1Cerulli Associates. (2022, January 20). Cerulli Anticipates $84 trillion in Wealth Transfers Through 2045. https://www.cerulli.com/press-releases/cerulli-anticipates-84-trillion-in-wealth-transfers-through-2045
2Rigby, R. (2019, October 14). Disinheriting your children might be for their own good. Financial Times. https://www.ft.com/content/eb4a390a-d926-11e9-9c26-419d783e10e8
3Mohan, P. (2019, July 18). 5 lies you’ve been told about generational wealth. Fast Company. https://www.fastcompany.com/90372281/5-lies-youve-been-told-about-generational-wealth
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