Record Amounts of Wealth Held by Retirees

Older Americans own more wealth today than they have at any other time in the history of the United States. While that may seem like it is good news for retirees, it poses some concerns as well. According to data collected by the Federal Reserve, Americans aged 70 and older had a net worth of $35 trillion at the end of the first quarter of 2021. The amount of wealth owned by 70-year-olds and older in the United States accounts for 27% of all the wealth in the country. That number is up a sharp 35% over the past three decades.

This fact has some important ramifications for the future. Let us consider two more pieces of data. According to Cerulli Associates, baby boomers and older generations will transfer nearly $70 trillion dollars to younger generations and charitable interests between 2018 and 2042. According to data from Capital One Financial Corp. the average inheritance received was $212,854 in 2019. The average inheritance in 1998, adjusted for inflation, was $146,844 in 1998. This represents a 45% increase in inheritance amount in just two decades! The vast amount of wealth to be transferred is eye-opening and has caught the attention of national politicians as a potential source of revenue to pay for wide sweeping social spending programs.

Implications for Future of Wealth Transfer

The projected wealth transfer between older and younger generations over the next couple of decades holds the potential to be a large shot in the arm to our economy. Wealth transfers in the form of inheritance help younger generations purchase homes, encourages entrepreneurial opportunities, and adds to and replenishes the coffers of charitable and other social organizations. Regardless of how the wealth transfer is utilized by recipients, it represents a source of financial stability for younger generations. The potential represented by the anticipated wealth transfer is not without potential challenges, however.

Challenges Ahead

Under current law, the gift-tax exemption today stands at $11.7 million for individuals and $23.4 million for couples. This represents the amount of money that can be transferred over one or two lifetimes, to heirs and beneficiaries without incurring gift tax. By 2026, however, the law sunsets and the amount of gift-tax exemption returns to previous levels of $5.49 million per person, adjusted for inflation. But another threat to tax-efficient wealth transfer is emerging.

The Biden administration is considering many tax proposals to fund their wish list of social spending programs over the next decade. One of the more alarming proposals is curtailing and/or reducing a $40 billion tax break used by millions of Americans annually: the step-up in cost basis for non-qualified inherited assets. The impact on wealth transfer strategies would be massive.

Next Steps to Consider

While there is likely to be considerable give and take, posturing, and negotiation in the hyperactive political landscape we currently find ourselves in, the vast amount of wealth to be transferred in coming years is in the crosshairs of Democrats. While we wait for the outcome of these political battles, we can begin to plan for future tax law changes to our wealth transfer process.

For retirees with a considerable amount of wealth today, consideration should be given to gifting strategies that will permit them to pass wealth to future generations while gift-tax rules are still favorable. This can be a precarious endeavor, however, as it involves predicting how much wealth they will need over the rest of their lives and how much they are comfortable gifting today.

Those anticipating inheritances, gifts and other wealth transfers could find themselves with higher than anticipated tax burdens and obligations in the future.

Frequent review meetings and communication with your financial planner and estate planning attorney will keep you current on the latest developments in wealth transfer law and taxation rules. Please contact Bollin Wealth Management at 419-878-3934 to schedule a review session to discuss your wealth transfer situation or for the names of vetted estate planning attorneys who may be able to assist you with developing an effective and tax-efficient wealth transfer strategy.

Sources: Federal Reserve, Cerulli Associates, Capital One Financial Corp., Wall Street Journal