The United States and other countries are currently experiencing the “Great Wealth Transfer,” an intergenerational transfer of more than $80 trillion in assets from the Baby Boomer and Silent generations to their Gen X and Millennial children and grandchildren. This transfer will take approximately 20 years and will affect a number of families in Alabama and across the country.
Alabama-based financial advisers say that growing numbers of their clients are seeking help with estate planning and, for those who own businesses, succession planning.
“It seems like everybody needs help planning for how to transition their assets or their businesses these days,” says Mike Innes, ChFC, CLU, CLF, a Huntsville-based financial adviser with Innes Insurance and Investments. “Rather than avoiding talk of what will happen when you’re gone, it’s better to take the right steps to create a plan so that your heirs won’t have to spend all your money on taxes and your assets can be used in the way you intend.”
In a recent survey of investors with at least $500,000 in investible assets, Raymond James found that 84% of respondents who work with a financial adviser have a documented intergenerational wealth transfer plan in place, but the same is true for only 66% of those who do not work with an adviser.
“For anyone in this stage of life, the best first step is to create a comprehensive plan that illustrates their needs, wants and wishes,” says Evan Brooks, financial adviser at Raymond James in Birmingham. “As we age, our priorities tend to shift from market returns and building wealth to legacy and keeping wealth. For business owners, working with an adviser who can help them value their business and create a smooth transition path is very important, as it will likely be the largest piece of their legacy.”
To effectively transition wealth or a business to the next generation, it’s important to prepare for the inevitable, consider taxes in your planning and communicate your plans.
Plan for Your Legacy
Most people don’t want to think much about their own deaths and what they’ll leave behind, but resisting those thoughts and conversations can result in negative consequences for your heirs. If you don’t have a plan for your assets, someone else — typically the government — will make decisions regarding your estate in your absence.
For example, Innes worked with a client who had significant assets including several thousand acres of farmland. He had made verbal agreements with his children about how the properties would be divided upon his death, but had no official written plan. After a stroke that left Innes’ client unable to communicate, family members did not agree on the estate plans. “It was a complete mess,” Innes says.
Rather than waiting until it’s too late to ensure a smooth transition, financial planners advise starting early and creating a documented plan. “The most important factor in executing a smooth transfer of wealth is having a documented plan in place and to regularly revisit that plan over the years to make sure it’s properly representing your current wishes,” said Joe Weaver, president of Raymond James Trust, in a statement. “The most common reasons for a break down in a client’s plan are the absence of preparation and taking the time to put appropriate documents in place.”
The first step to appropriate estate planning is to assemble the right team. Depending on your assets, you may need a banker, financial planner, insurance agent, tax attorney and CPA. “If you have a large estate, you don’t need a boilerplate estate plan,” Innes says. “You need someone who will dive in and do what you want, when you want it.”
For aging Americans who own businesses, that team may also include business valuation professionals or business brokers. “Whether a business owner plans to sell to someone outside of the family, inside the family or pass the torch to the next generation, the first step is to value the business,” Brooks says. “Our firm is being proactive, given the age trends of the typical American business owner, to make this step as easy and straightforward as it can be. With a few data points, we can give you a good idea of what your business is worth and connect you with potential buyers. Whether a business owner chooses to sell is their decision, but knowing what you have is vital to the other planning pieces and sets a clear expectation for their heirs and employees.”
Once you’ve assembled the right team of professionals to help, start with the following steps:
Visualize your legacy. “Paint a vivid picture of how you envision your legacy and wealth transfer,” says Ashley Folkes, CFP, founder and managing partner of Inspired Wealth Solutions in Birmingham.
Consider gradual transfers. “Consider distributing assets in stages to witness your heirs’ enjoyment and create a living legacy that reflects your values,” Folkes says. For example, you might want to take advantage of gift laws to give your children part of their inheritance tax-free while you’re living, or use some of your assets to purchase a family vacation home or a family vacation to enjoy with your heirs.
Create a will or trust. Draft a legally binding will or establish a trust to ensure that your assets will be distributed according to your wishes. When you set up a trust to manage your properties or assets, it allows you to “dictate from the grave how the money will be spent or divided,” Innes says.
Adjust real property titles. If you have real estate such as farmland or homes, consider adjusting all property titles to “transfer on death” (TOD) titles, Innes says. That way, the property will transfer directly to the heir without having to pay estate taxes on it. “If you have farmland, for example, you want your heirs to be able to pay property taxes and keep the farm income coming in, not have to sell the land in order to pay the estate taxes,” Innes says. “By doing some planning in advance, you can prevent your kids from having to have a fire sale to pay the taxes.”
Create alternatives and contingencies. Life is unpredictable, so it’s wise to create alternative plans to address unforeseen events. For example, what if you have an unexpected grandchild? What if one of your heirs dies? “Flexibility and adaptability are key to navigating changing circumstances while safeguarding your wealth transfer objectives,” Folkes says.
Evaluate business succession options and implement a succession plan. If you are passing on a family business, consider various options, such as grooming a family member to take over, selling the business to an outside party or transitioning to employee ownership, Folkes says. When you’ve selected an option, “develop a detailed succession plan to ensure a smooth leadership and ownership transition,” he says. “This plan should include identifying and training potential successors, establishing roles and responsibilities, and addressing any potential challenges.”
Consider Tax Liability
More than nine of 10 (91%) of respondents to the Raymond James survey said that tax efficiency is “extremely” or “somewhat” important, but 37% answered “no” or “not sure” when asked if their wealth transfer plan includes tax efficient strategies. Rather than leaving the taxes on your estate to chance, the firm suggests taking steps now to maximize tax efficiency.
In 2024, the estate tax limit will be $13.61 million. Estates that are worth less than that amount may be able to bypass probate (and estate taxes) for a significant portion of their wealth, using tools like TOD accounts, updated beneficiary information on retirement accounts and insurance policies, and up-to-date estate documents, Brooks says.
There are a number of strategies available to minimize taxes on your estate. Some of the most common include:
Gifting strategies. You can prevent taxes on some of your assets by giving gifts to heirs while you are living.
Asset location. Different account types offer different tax advantages, so it can be wise to “strategically allocate assets now and plan for the future to reduce tax burdens for your heirs,” Folkes says. “Consider Roth conversions as an example; pay taxes today on a lesser amount and allow assets to grow tax-free for your heirs.”
Step-up in basis opportunities. Assets that are held in taxable accounts may benefit from a step-up in cost basis to the date of death for heirs, Folkes says. This means that heirs would only owe taxes on any appreciation from the date of death until the asset is sold, rather than appreciation from the original date of purchase until the asset is sold. If you’re selling or leaving a business to an heir, Innes recommends transferring stock to a revocable trust before the transfer is complete to allow them to benefit from a step-up in basis.
Charitable giving strategies. “Charitable remainder trusts are split-interest vehicles that allow you to contribute to a trust and receive different partial tax deductions,” Folkes says. “Then, your heirs can potentially receive an income stream for a period of years. You name one or more charities to receive the remainder of the donated assets.”
When you’ve made all the arrangements for your estate to be handled according to your plans, make sure you let your heirs know where to find all the relevant documentation.
Communicate with Heirs
In addition to communicating with heirs about where they can find important information, it’s also important to communicate about the plans you’ve made for your assets and how they will be divided.
In the Raymond James survey, 71% of respondents said proactive communication of wealth transfer plans would be important to them if they were receiving an inheritance, but just 45% report that they are “extremely transparent” with their own heirs.
“While financial matters are important, maintaining family harmony should also be a priority,” Folkes says. “Balancing the needs and aspirations of family members can help ensure a successful wealth transfer process. Open communication among family members is crucial. Discussing intentions, expectations and responsibilities can help avoid misunderstandings and conflicts later on.”
YOUNGER GENERATIONS: ARE YOU PREPARED TO RECEIVE AN INHERITANCE?
Just as aging Americans need to make careful preparations for leaving their assets behind, it’s wise for their children and grandchildren to be prepared for receiving an inheritance. “Whether through self-education or by consulting with financial advisers, it’s crucial to understand the implications of inheriting wealth,” says Folkes. “A trusted adviser can provide guidance, act as an accountability partner, and offer a rational perspective on financial decisions.”
The following general steps can help members of younger generations prepare to receive and manage an inheritance judiciously.
Control emotions. “Inheriting wealth can evoke strong emotions, especially if it comes following the loss of a loved one,” Folkes says. “It’s essential to manage emotions effectively to make rational decisions and avoid impulsive actions that may have long-term consequences. Take the time to grieve and seek support to navigate this transition period effectively.”
Understand tax implications. It’s wise to familiarize yourself with the tax implications and potential penalties associated with the inheritance you expect to receive, Folkes says. Understanding tax laws can help you maximize the value of your inheritance and avoid unnecessary losses.
Create a spending plan. You can manage your inheritance wisely and avoid depleting it too quickly by building a structured spending plan. “This involves budgeting for immediate needs, long-term goals, and potential investments while avoiding impulsive spending,” Folkes says.
Adjust investment strategies. “Inheritance should change the way young people think about investing,” says Brooks. “Generally, a younger person has a higher appetite for risk [to achieve desired returns by retirement age]. With an inheritance, you might not need to assume the risk that most other young people do to have the best outcome. Honest conversations between benefactors, beneficiaries and advisers will set better expectations and ensure that those benefactors have a say in how their legacy will be honored. This will also take the guesswork out of financial decisions for beneficiaries and allow them to make more informed investment decisions.”
Nancy Mann Jackson and Dennis Keim are freelance contributors to Business Alabama. She is based in Madison and he in Huntsville.
This article appears in the May 2024 issue of Business Alabama.
