The amount of wealth being passed from one generation to the next has reached unprecedented levels in the United States. Within a generation, an estimated $3.2 trillion is expected to be passed down to inheritors.
One reason for this is The Tax Cuts and Jobs Act of 2017, which increased estate tax exemptions through the end of 2025. These exceptions have the potential to change the demographics of wealth in the U.S.
“Right now a couple can leave $22.8 million dollars to whomever they want without paying tax at the federal level," explains Bill Ringham, director of private wealth strategies at RBC Wealth Management-U.S. Under the old rules, he says, they might have had a significant tax liability.
But the tax changes and the sheer volume of wealth moving between generations has overshadowed the dynamics surrounding that transfer. Both statistics and anecdotes (like the many examples behind the shirtsleeves-to-shirtsleeves in three generations adage) have shown high-net-worth (HNW) families trying to pass on wealth can be plagued with trust issues and lack of communication.
According to New wealth rising, a survey by The Economist Intelligence Unit (EIU) commissioned by RBC Wealth Management, 75 percent of HNW respondents say it's more important than ever to future proof one's wealth.
The New wealth rising survey, which targets high-net-worth individuals (HNWIs), adult children of HNWIs and high-earning professionals across the U.S., Canada, UK, China, Hong Kong, Singapore and Taiwan, explores the future of wealth, including where and how it will be invested. With the largest transfer of wealth in history underway, major attitudinal shifts are emerging. Interests are swinging from local to global, smart philanthropy is taking hold, and impact and alternative investing are going mainstream. As wealth shifts—globally and from one generation to the next—the influence of affluence will change.
Around half (51 percent) of those surveyed say compared with a generation ago, wealth is less easily attained or preserved today. Lack of communication tends to inhibit wealth preservation.
“Sometimes kids just have no idea how much money their parents have — their parents have grown up leading a modest lifestyle, they don't live extravagantly," says Ringham. “The last thing we would want is a child to be surprised and unprepared for the amount of wealth they've just inherited."
Taking the time to prepare the next generation through communication and strategic transfer of responsibilities can help ensure they have a concrete understanding of the values underpinning the family legacy.
Involving the next generation
Focusing on financial education at an early age is a key part of setting younger generations up for success, says Liz Jacovino, a wealth strategist with RBC Wealth Management-U.S.
“A lot of our clients' children haven't had the opportunity to get a basic financial understanding," says Jacovino. “If their parents were to pass away earlier than expected, those children could find themselves the immediate beneficiaries of a trust, having a significant amount of assets they'll have some responsibility for."
The New wealth rising survey found 39 percent of younger HNWIs in the U.S. believe parents have an obligation to leave an inheritance for their children.
This is why Jacovino always advocates for working with a client's heirs to ensure they gain an understanding of how a trust works, what the responsibilities are that come with being a beneficiary, what a trustee's role is and where an investment advisor fits in.
“All of that can be done without specific numbers," she says. “So if the inevitable happens much sooner than expected, they know their children have some level of education around their finances and frankly know who to call and who's going to help them."
