Effective Strategies for Wealth Transfer to the Next Generation

Welcome to Ewa’s finlit podcast. Ewa is a fee only RAA based out of Pittsburgh, Pennsylvania. We hope all listeners of this podcast will benefit as we deep dive into complex financial topics that we will make simplified for you. And we hope that this really serves as a catalyst so that you can make the best financial planning decisions for your family and also save time.
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Speaker 2
00:29
So this week I’m joined by Devin’s newest EWA team member. Just started this week, so this will be his first episode on the podcast. Excited to have you, Devin.
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Speaker 3
00:38
Thanks, me too.
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Speaker 2
00:39
We’re going to talk about, do a deep dive into pros, cons, strategies of making wealth efficiently, healthily, effectively transfers to kids and next generation. A lot of good stuff to dive into. But Devin, why don’t we, I don’t know, share something, share an interesting fact about yourself so people can get an idea who reads.
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Speaker 3
01:00
Interesting fact about myself? Maybe just the fact that I’m a big reader. I love reading fiction, non fiction, up, down, left, right. I love it all. And ideally, we get into a little bit of that for the podcast. Favorite book of all time favorite fiction book of all time is Gates of Fire by Stephen Pressfield. It’s about the Spartans, the Battle of Thermopylae. That’s kind of the central event in the story, but we’ll get more into.
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Speaker 2
01:27
That non fiction later.
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Speaker 3
01:29
Favorite non fiction book? It’s a tough question. I’d say maybe fooled by randomness, by Nassim Taleb.
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Speaker 2
01:39
I know who he is, but I’ve never read the book.
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Speaker 3
01:41
Yeah, we’ll be checking it out for sure.
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Speaker 2
01:43
Cool. Well, this is, I think one of the most important topics, especially with high net worth people, is making sure that there’s actually a lot of studies that have been done on high net worth people. So I would probably classify that. I mean, really anything over anybody with extra money. So that could be, there’s a lot of variables there. It depends on spending, lifestyle, but anyone that’s going to have money left over that they’re not going to spend, which is most people, especially with the type of the clients that we’re working with. And there’s studies that have shown that the most important thing in their life is making sure that they’re heirs. And I say heirs because it could be kids, grandkids, nieces, nephews, whoever the money’s going to that they’re taking care of.
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Speaker 2
02:30
If you really like, kind of peel the onion back with a lot of high net worth people, that’s like the root of what’s most important to them. So I want to share some key statistics. And this is, I think this is more of, like, the artful side of financial planning. There are some tactical stuff, you know, tangible strategies we’re going to talk about, but a lot of this is more of like an artwork, having the right conversations. But I want to share some statistics that I just think are so fascinating that should put this on to perspective. So statistically, 70% of wealth is gone by the first generation. So let’s say you have husband, wife, or two spouses, doesn’t matter. They have a large pile of assets. 70% of that, statistically, is going to be gone by the time their kids die.
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Speaker 2
03:16
And then their grandkids, 90% of that’s going to be gone by the time that they die. So that is insane to me, that most of if this is not done appropriately, this could all just go away. And then I think now the next 20 years are really crucial. This is an interesting time that we’ve never seen anything like this in history. And the reason is baby boomers right now are all getting ready to retire, and they hold majority of the wealth. So it’s estimated between. Until 2042, about $68 trillion will be transferred to the next generation in the United States. This is the largest wealth transfer the United States, maybe the world has ever seen. Baby boomers hold over half of the total wealth in the United States, with an estimated 35 trillion is expected to pass in the next ten years.
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Speaker 2
04:06
And then the average inheritance. So do you know what the average net worth is for somebody at 65 in America?
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Speaker 3
04:14
It’s probably lower than, I think, very low, 100k.
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Speaker 2
04:17
It’s like, I think it just went. It’s between like 250 and 300,000. Okay, so the average inheritance received in the US is $295,000. So obviously, like, could be way higher. Could be lower. But if you put that into perspective, the average net worth at 65 is like that or less, and then you immediately double your net worth. Like, there’s a lot of implications that come with that.
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Speaker 3
04:38
Can I interject one thing real quick? Excuse me. I would imagine a lot of people listening to this are thinking, this is never going to apply to me. I’m in my fifties. I’m struggling to save for my own retirement. I’m just going to stop playing this right now. Correct me if I’m wrong, but people tend to over save more than overspend, especially when you spent 40, 50 years saving for that retirement. So, point being that you might end up at 75 or 85, or whenever you eventually pass with significant assets that have to go somewhere. So this is probably a topic of conversation that is pertinent to you and your situation, even if you might not have enough assets right now.
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Speaker 3
05:19
But over the course of the next few decades, when azure assets grow and you don’t spend down those assets, this is probably going to be, it’ll be a first world problem to have, but something that you will have to deal with in the future.
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Speaker 2
05:29
Yeah, a lot of people. Another hard problem as a financial advisor is getting people to spend their money. The best savers are the worst spenders. So especially a lot of high net worth that have accumulated a large amount on their balance sheet they don’t want. Psychologically, it’s hard to see that money get spent out. So the reality is, exactly what you just said, probably is gonna be something left over. And this will apply to most people. Obviously, the scale of it could depend on net worth. A couple more 70% of wealth transfers expect to go to children and grandchildren, while 30% would be distributed to other heirs, which could be charity taxes, nieces, nephews, brothers, sisters, and then this one’s fascinating. Studies show that about 34% of heirs save or invest their inheritance. A third of people that inherit money save it.
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Speaker 2
06:18
Another third, approximately 36%, used to pay off debt. And then 21% spend it on luxury items or significant purchases like homes, cars. Why this is so important is because a lot of very high net worth people have gone through really hard. Not all, there’s an assumption, but a lot, from my experience, have gone through hard things, a lot of stress. They’ve dedicated their lives to their career, they’ve worked really hard to accumulate. And unless you teach your kids those values and those lessons, they may not have to go through all the hard stuff that you went through. And so if you immediately got handed a bunch of money, it’s very easy to just blow it on luxury items.
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Speaker 3
06:56
Yep.
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Speaker 2
06:57
Okay. Anything to add on?
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Speaker 3
07:00
Yeah, to that last point. I mean, I’ve been thinking about this a lot, and I think at the core of this is if you have. If you either have or expect to have a lot of money that you’re going to eventually give to your heirs, you know, with grandkids and nieces and nephews, maybe not as much control, but if it’s to your kids, which most of the time it is to the kids, at least most of the money. The key is to this is harder than it sounds, but to raise them right, to teach them the right, maybe the values that align with your.
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Speaker 3
07:29
I’m not going to make a value judgment, but the point being that if you raise them to understand the power and the value of money and to have gratitude and accountability and some sort of ambition, as opposed to entitlement and all the negative emotions and kind of situations that come up when you have significant assets, that’s the key. The key is not necessarily the structuring of the trusts or the tax optimization. Right. Those are just kind of bolt ons to. Because it doesn’t matter if your kids, my, let us wear if your kid is, if you’ve raised your children the wrong way, certainly the structuring of a trust can help with that.
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Speaker 3
08:10
But it’s still going to be a tough situation once they have the money, raise them the right way, raise them thoughtfully, teach them your values, pass those along, especially if you’ve been successful, especially if you’ve kind of accumulated some assets, and I think the rest will kind of, it will help, but it’ll fall into the play.
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Speaker 2
08:25
Correct me if I’m wrong, totally spot on values. And then a lot of this comes down to like behavioral finance, which is to me, that’s the reason why the average, back to statistical bigger, the average net worth is so low in America is because of behavioral finance. It’s very easy to get on the hedonic treadmill and want to buy the nice thing to impress your neighbor, impress somebody. Definition of being rich is buying things. I don’t know if this is the textbook definition. This is my definition, the definition of being rich. Obviously your lifestyle is taken care of, but you have things that impress other people. Definition of being wealthy is having enough money and that your balance sheet kicks off enough income to support your lifestyle, that you’re financially independent, you don’t have to work.
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Speaker 2
09:09
You have the autonomy and the control to do what you want and spend your time how you want. So, no, I totally agree. We’re going to get into both of those in a little bit more detail. The tactical tips, tactical strategies, and then just some more general tips going along with the values and stuff. But one thing I want to highlight that I think is really fascinating and relevant here. There was, we’ve talked about before in the podcast, I love psychology. I think it’s just so fascinating. You can apply it to any facet of life, finances, business, anything. But there’s this Harvard 70 year happiness study, very popular study in psychology. They basically followed people from, I think, birth through 70 years of their life.
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Speaker 3
09:52
Started in the forties or fifties, I think so, yeah.
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Speaker 2
09:54
Yeah, it’s still going on. And so basically, they looked at what contributes to people’s long term happiness and well being. And the one point that I want to highlight is there’s a lot of different things between relationships, loneliness. But the one thing it was a key aspect of this was the importance of work and fulfillment. And how this relates to wealth transfer is basically one of the key things to work and fulfillment is instilling work ethic working. So why that’s important is if you have children, just say, under the age of 18. Let’s play out two scenarios. Scenario one, both scenarios, you have super wealthy parents. Scenario one, kids don’t have to work for anything. They don’t ever have a job. And a job doesn’t need to be like, going and making money somewhere.
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Speaker 2
10:47
It could be as little as doing something around the house to earn an allowance, little things like that. They don’t have to do anything from a work standpoint. And the parents just kind of spoon feed the money. Spoon feed the money all the time. The studies, basically, the study says that they’re going to have a hard time being fulfilled, finding happiness later their life. Where the flip side is, from a young age, if, again, these high net worth people, they’ve worked really hard, the kids see them going to work every day, working long hours, and they can kind of absorb some of that work ethic. And it could be, again, as little as you’re working for an allowance, maybe they do get an actual job to earn income, but that key thing alone will drive the rest of their life.
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Speaker 2
11:29
And fulfillment, work, happiness, all of those things, I think, can be like, if you were to say, what’s one little thing to take away from this? It’s probably that would have the biggest impact. Anything to add?
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Speaker 3
11:43
Yeah, I mean, I don’t want to go on too much of a tangent, but that’s kind of the key, right? Is just instilling those values like we talked about at the beginning, and that’s the start. And I totally agree with that. That concept for sure.
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Speaker 2
11:55
Yeah. So, okay, so let’s talk about just like, general tips, and then we’ll get into the tactical strategy. So the big thing we talked about, instilling values, not so much. Financial literacy is really important just to make sure they’re not. They have a basic understanding of finance. But I do want to know. I’ve heard clients a lot come to me and say, we, like, totally failed as parents. Our kids don’t understand this or they don’t understand this. Like, very basic financial concepts. And I always say that’s super common because financial literacy is not taught in schools. So it is kind of the parents job, unless you go to, you know, go to school for finance or something specific in the field, even in that it’s not necessarily taught, but it is really the parents job to teach them that stuff.
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Speaker 2
12:38
So it’s very common if you do feel that, like, hey, my kids don’t have this understanding of finance that they. That I would like them to. But first tip would be to have an open dialogue, talk about money. I think society as a whole is more. It’s almost like not. It’s almost more acceptable to not talk about money than it is. Obviously, you don’t see people run, maybe you do on social media, but you don’t see people running around talking about how much money they have. And that’s the extreme end of it. But it is really healthy to have those conversations of, hey, here’s how much. Maybe not specifics on how much money you have, but here’s how certain things in finance work, and making sure that the kids have financial literacy to make, you know, sound decisions the rest of their life.
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Speaker 2
13:24
Second thing would be, there’s a fine line between helping and enabling. Back to the analogy, or the scenario we used before. If you spoon feed the kids and hand them money all the time, they’re going to rely on that. They’re not going to develop, you know, they’re not going to go through hard things and fail, and you’re enabling them really, and setting them up to. To fail the rest of their lives. And then another big thing that can be helpful is philanthropy. High net worth individuals. Another statistic, increasing estate. Philanthropy and estate planning has gone up, basically, in the last few years. There’s an estimated $9 trillion of that, 68 trillion that’s expected to transfer, 9 trillion of that is expected to be donated to charities. So that’s. What’s the percentage there? A 6th, almost, something like that?
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Speaker 3
14:10
Yeah.
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Speaker 2
14:11
Yeah. It’s a 20% or less than 20%. And donor advised funds, which we’ve done episodes on, in 2022, donor advised fund balances have reached over 140 billion. So basically, there’s a trend upward of people being more charitably inclined. And I think that can be really useful, involving kids in philanthropy and teaching them the power of giving. And, you know, how you can use the money to do other things and promote good in society. And then the last tip, I would say, is, just have resources. So what we’ll do any client that works with us, we treat their kids just like they’re a normal client. If they’re in high school or college, we always will, you know, encourage sitting down with them, having these finance conversations just so that they can get a general understanding of financial literacy and making the right financial decision.
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Speaker 2
15:05
But I think that it’s. I think naturally, kids go through, again, general assumption. There’s obviously this is to always happen, but naturally, you go through a period of almost, like, rebellious rebellion where you may not always want to listen to your parent, even if the parent is correct. So sometimes it helps to have a third party, unbiased opinion talk to the kids, and it can really reach them and be more useful. So I would say, yeah, just have resources for them and I ways people for them to talk to and ways for them to gain the proper education. But anything to add?
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Speaker 3
15:38
I couldn’t agree more, man. I mean, somebody with a teenage daughter, you know, sometimes the message will get through, but you have to deliver it in the way that it will actually be absorbed. Yeah. Rebelliousness in a teenager is always going to be a factor, but if you do it the right way, they’ll learn. And I think having a third party do it, whether it’s a family member or financial professional, is a great way to kind of operate.
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Speaker 2
16:04
I should have started this, but I don’t have kids. So, like, this is all. This is not firsthand experience.
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Speaker 3
16:08
Oh, I don’t have millions of dollars.
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Speaker 2
16:10
This is just from client meetings, working with a lot of clients, and seeing what they deal with. So I don’t have firsthand experience with kids, but it’s good that you can give that perspective.
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Speaker 3
16:19
Yeah, I’ve got some perspective.
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Speaker 2
16:21
Okay, let’s talk about tactical strategies. So, obviously, like we said, I believe money and wealth is basically just like a tool, a catalyst, a resource. So it’s a way to allow you to live the life that you want to do, the things you want to do. And so once you’ve had those more artful philosophical conversations, values teaching, financial literacy, some tactical strategies, we can do. Let’s start with estate taxes. So that’s a huge. That’s kind of the driving force on a lot of this is most people don’t want to pay a ton in taxes. And when I mean a ton, it can be a ton. Right now, the estate exemption, on a federal level, each state has their own different inheritance status. We’re going to talk federally. The estate exemption is about a little over 13 million person.
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Speaker 2
17:14
So between two spouses, 27 million, approximately, can pass tax free to anybody. Anything above that gets clipped at a 40% federal estate tax level. So if you have a $50 million net worth and you were to die tomorrow, 20. Again, just federal level, 27 million is going to go tax free. If both spouses would die, 27 million. That other 13, sorry, 23 million. I should be able to do this math in my head, but 40%, 9 million of that’s going to go to taxes, so 14 million would go to the kids. So that’s really important, because in 2026, the 2018 tax overhaul that was put in place is set to sunset in 2026. So this election could have an impact on what happens there. Total speculation, who knows? But if no law changes 2026, that’s going to get cut in half.
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Speaker 2
18:11
It’s going to be adjusted to inflation. But let’s just say it’s 1213 million a person. Anything above that, now, you could be subject to that 40% estate tax. And there were actually proposals. When was the last election? It was like, 2021. There were talks to bring that down to 3.5 million, so it’d be 7 million. So, bottom line, I think my professional opinion is that number is probably dropping. So it’s gonna be a lot more people are gonna be affected by it. I think 20 years ago, that number was a million, which to think about now is, like, insane. This is the biggest the exemption’s ever been. So what, first thing we wanna do is let’s just not pay unnecessary estate taxes if we don’t have to. So one way is just gifting money out of your name, out of your estate.
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Speaker 2
18:52
So if we know there’s gonna be a surplus of money at the end, and it’s gonna be over, that estate exemption, you have a freebie of $18,000 per year person, per spouse, that can just be gifted outright to anybody. It doesn’t have to be reported, you don’t have to file a gift tax return. But we can do a couple of things with this. Number one, if kids are adults and they’re working, they’re responsible. We could gift it outright to them. We can make them do things. Not make them, but educate them, and do things like Max out your 401K, use the gift for spending money, so that more of their paychecks going to the 401K, max out Roth iras, 529s are an option, depending on how old the kids are.
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Speaker 2
19:34
Put money into an investment account, but putting it in these mechanisms, that is protecting it, and not just putting $36,000 into their bank account every year, and along the lines with those gifts, what we’ve seen, the most successful is to not have them planned. So not saying, okay, I’m going to give you $1,000 a month. Because then they start to depend on it and rely on it. Just kind of doing it sporadically here and there. Not even. Not even as planned as like, just on holidays, like literally just randomly throughout the year and varying the amount so that they just cannot depend on it. That’s usually super helpful. And then what we found, again, having the conversations is really important, but also tell we’ve seen successful telling the kids, hey, I’m gonna, like, I’m gonna. I’m gonna help you.
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Speaker 2
20:17
I’m gonna gift you some money, but I want you to think about this like, you’re not getting any inheritance. There’s gonna be nothing left for you, even though there probably will be, there’s gonna be nothing left for you. And then the kids psychologically can be like, okay, I’m not gonna depend on that. Because I’ve seen this so many times where we try to do. Not even with clients, kids, with just people that I’ve met with, where it’s like we’re trying to do financial planning and they’re like, well, why would I save for retirement? I know I’m gonna inherit millions of dollars 20 years from now. So that is not the mindset you wanna have. So that can be anything to add on that, and we’ll talk about gifting it at trust.
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Speaker 3
20:51
Yeah. Again, not to go on too much of a tangent, but there is a discussion, or at least a thought that can be had by folks out there and clients as to when do I want to gift the money, right. You mentioned kind of the freebie, the person per year, but you can gift more during your lifetime. Right. Whether that’s to your heirs or to charity. And either just concept, it’s fairly new of kind of die with zero. Right. You kind of mentioned it right there. Yeah. Highly recommend rent. Recommend reading it to anybody that’s out there. But the idea of, if you want to ask yourself one question, what would be more impactful for my children, let’s say a new house in their twenties or thirties or $10 million when they’re 65.
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Speaker 2
21:33
A new house, probably.
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Speaker 3
21:34
Yeah. Again, no value judgment here, but it’s worth a thought because there’s so much, there is so much cultural, let’s call it pressure to just, you know, accumulate all this money and spend what you can. And then when you die, the money goes somewhere. But maybe it’s worth, maybe it’s worth it to rethink that concept, to say, hey, maybe it makes more sense to gift money while I’m alive. And that’s a lot what that book talks about. And it’s something that I, again, don’t necessarily maybe agree with, but it’s worth thinking about and asking yourself those questions.
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Speaker 2
22:05
It’s a really healthy way to see what the kids are doing, going to do with some money while you’re alive. And you can kind of have, you know, have your hand in the pot and make sure they’re doing the right things, guide them through it, make sure they’re making the right decisions versus way down the road they get $10 million. And who knows, you know, back to the statistics, 70% of it’s gonna be gone, and then 90% of it’s gonna be gone, and then some more tactical tips. So if they are, if they’re under 18, one useful thing could be, you know what you. Obviously, we’re not going to gift money outright to a ten year old. That’s nothing good is going to come there.
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Speaker 2
22:39
So we could gift into a trust, different types of trusts, but this would basically be setting up a trust is a legal document. You open an investment account owned by the trust, and the trust basically sets rules and mechanisms that. I’m going to use an example, say, okay, the money’s going to go in this trust. If it’s an irrevocable trust that’s now out of my estate, so I can gift money into it’s out of the estate, avoids that 40% inheritance tax. And we could say, okay, when they’re 20, anytime, they could use the trust for. And these are, again, this is just a common example. They could use it for health, education, maintenance and support.
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Speaker 2
23:20
So if they need health, anything for health, anything to go to college or any education, maintenance, support, maintaining lifestyle, and then you could say, when they’re 25, they could access a third of it if they want to. When they’re 30, they could access a third when they’re 35. You could play around with those ages, depending on how responsible the kids are. But that’s one way to, again, like you said earlier, that helps. But if you don’t have those upfront conversations, then that’s not solving all the problems. But there’s some tax benefits, plus some safeguards to. Safeguards to make sure that they’re, you know, not. They’re being somewhat responsible.
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Speaker 3
23:56
Yeah, I mean, it’s essentially a way to control the flow of assets after you are no longer alive.
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Speaker 2
24:02
Yeah.
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Speaker 3
24:03
Right. I mean, I don’t want to oversimplify, but that’s the way that I see it.
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Speaker 2
24:06
And then the key there is making sure you have the right trustee, which we don’t need to get into that right now, but having the right trustee and making sure that somebody’s overseeing it to allow them to make responsible decisions. Yeah. Anything else to add? I would say that’s a pretty good overview.
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Speaker 3
24:24
Yeah. I’m curious, in your experience, Jameson, what are some of the primary questions and fears and worries that some, maybe higher net worth clients have? Is it typically x or typically y?
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Speaker 2
24:39
Anything around this subject?
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Speaker 3
24:40
Exactly. Yeah. Anything in particular that you see all the time?
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Speaker 2
24:45
Yeah, basically, it’s just like making sure that, I would say a lot of this is a very common one. If it’s a new relationship, like with a client, they’ll even be like, hey, before we engage in this, we want to make sure that you’re going to be involved with our kids, like now. So it’s just more so making sure that they, the kids have a resource, someone to go to, and the kids have the education to make the right decisions, I would say.
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Speaker 3
25:15
Yeah, I think that. I think that’s great. And I’m having the same, you know, as a father myself, I have the same kind of worries and fears, you know, and thoughts, just how do I. How do I teach my daughter to save and spend the. Again, whatever you deem the right way. Right.
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Speaker 2
25:30
Yeah.
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Speaker 3
25:31
Just kind of. Kind of passing on those values. Because it is important. It’s very important. Yeah.
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Speaker 2
25:34
And it’s not taught. It’s not, like we said, it’s not taught in school. It’s nothing. You could research it yourself. There is a lot of really bad financial advice online, so you won’t know what you’re researching, but yeah, it’s not taught. So making sure that the resources are there, they have someone to talk to, and the proper education is in place. But, yeah. Anything else to add?
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Speaker 3
25:56
Maybe just lastly, and this is somewhat topical because Warren Buffet just announced that he’s giving, I can’t remember the number. It’s 130 billion, something like that, to his kids. You know, Warren’s in his nineties, so his kids are in their sixties or seventies, and I believe all of them are involved full time in philanthropy. So he’s giving them the money, kind of do whatever they want with it. And this was announced, I think, this week, maybe last week. Anyway, I just maybe want to end on a quote by Warren, the great. Warren, he said, quote, and he said this a while ago, but I want to leave my children enough so that they can do anything, but not so much that they can do nothing.
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Speaker 3
26:30
And I think that is an excellent quote and a great way to kind of raise children when you do have significant assets or money or income.
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Speaker 2
26:37
It was either him might have been Charlie Munger. Another quote was like, if you give, it’s like if you give your kids money or too much money, they’ll mess their life up. If you don’t give them enough money, they’ll hate you. If you don’t give them any money, they’ll hate you or something. So it’s basically, he was basically saying.
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Speaker 3
26:55
It was something like, if you have money got, you have to give your kids, it has to go to your kids because either you’ll mess them up or they’ll hate you or something like that. Yeah, that’s a good one.
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Speaker 2
27:04
But yeah, no, this is an interesting topic. It’s a big issue that we are excited to solve for high net worth people. I think it’s something that’s always front of mind for them. And yeah, if you have any specific questions, feel free to reach out. We’re happy to help.
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Speaker 1
27:18

Thanks for tuning in to our podcast. Hopefully you found this helpful. Really hope this is as beneficial and impactful to as many people across the nation as possible. So hit the follow button, make sure to rate the podcast and please share with any friends or family members that would also find this beneficial. Thank you very much.
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