The Great Wealth Transfer: Tips for a Smooth Transition

Recent research projects that from now through 2045, baby boomer households will transfer over $53 trillion to younger generations and charity as part of the “great wealth transfer.”¹ While some of these handovers will occur at an individual’s passing, lifestyle changes and tax planning are spurring many to consider lifetime wealth transfers.

The Silver Tsunami Contemplates Retirement

As the last of the baby boomers approach retirement age, many are taking a closer look at their finances. For baby boomer business owners, this often means planning for the future of their business. According to a recent survey, more than three quarters of baby boomer business owners wish to exit within the next 10 years, with 57% eyeing an exit within five years.²

Exiting a business can take many forms. Family-owned businesses may seek to draw younger members into leadership positions and transfer ownership over time. Often, the focus tends to be retaining family control while funding retirement or an inheritance for those charting a different course. Other owners might sell to a third party—often private equity or strategic buyers—or even to their own employees through an Employee Stock Ownership Plan (ESOP).

While selling a business can provide a significant financial windfall, it also presents its own challenges. Business owners swept up in the great wealth transfer may struggle with how to use the sale proceeds to benefit their loved ones and charitable organizations without causing disruption. Strategic wealth transfer planning can be a key part of the solution.

Transfer Tax Planning—Timing Transfers to Maximize Results

Another reason to consider lifetime wealth transfers? The ability to amplify the gift and estate tax benefit. Planning ahead and transferring assets during your lifetime can help you leverage a smaller amount of your lifetime exclusion from federal gift and estate tax—known as the “federal exclusion amount”—to deliver more wealth to your loved ones in a tax-efficient manner.

Amid the great wealth transfer, current law provides additional incentive. As of January 1, 2024, each US citizen and permanent resident has a $13.61 million federal exclusion amount to shield transfers made during life and/or at death from tax. However, this amount will fall by half on January 1, 2026—leaving a forecasted federal exclusion amount of $7.2 million. Since you must use today’s higher level of exclusion in order to preserve it, many wealthy individuals are considering making sizeable taxable gifts before the expected drop.

The Time Is Now … Now What?

Knowing that you can or should engage in wealth transfer planning is quite different than knowing how. Those facing the great wealth transfer may find the following steps helpful.

Discover Your Drivers: The first step for navigating a transfer is taking stock of your goals:

• If you’re preparing to exit your business, have you thought about what you’ll do afterwards? How will your sense of identity change once you’re no longer a “business owner”?
• When it comes to supporting the next generation, do you have a specific level of support in mind, or do you want to leave as much as possible?
• And what about your legacy? Do you want to support larger causes or social movements? Will you do this through philanthropy, focused investing, or some other way?

These are weighty questions and may seem overwhelming to tackle alone. But through facilitated exercises, families can share their ideas around legacy and purpose while building a cohesive vision for their future.

Plan With Purpose: Once you’ve honed your vision, the next step is to size and structure your strategy.

• What are the income tax implications of selling a business interest? What are your options for deferring or avoiding tax?
• Should you prioritize income versus transfer tax planning when structuring a sale or gift?
• How much should you transfer to younger generations? How will such transfer impact your lifestyle?

When it comes to wealth transfer planning, choosing the right transfer strategy can be a daunting task. It’s not always easy to see how your decision will impact your lifestyle and long-term goals. But it’s important to consider the effects of your choices. Once the ink has dried on that sales agreement, trust document, or deed, how will the ripples from this transaction show up on your yearly income tax return? How will it affect the way your children pay for their education or other important expenses?

Consider the question of how much to transfer. A good first step in sizing a wealth transfer is quantifying your core capital—that is, the level of assets needed to sustain your spending needs with a high degree of certainty. Not only does it incorporate your existing spending needs but how those needs may change over time and how the markets will impact your available liquidity. Bernstein’s modeling capabilities can help you avoid executing a transfer you might come to regret.

Implement Strategically: Lastly, select the right investment tools to execute on your plan of action.

• If you’re losing a steady stream of income from selling your business, can you replicate a similar level of liquidity from your portfolio?
• If a business exit occurs in stages, such as accepting rolled equity as part of an initial sale, how can you compensate for this concentrated position in the interim?
• If elements of your financial plan have differing time horizons, how will this impact your access to the leading drivers for return, including alternative investments?
• Can you tie together differing goals, such as a business exit and establishing a new philanthropic venture, in a way that allows you to boost the benefit derived from both?

A thoughtful advisor can help identify additional opportunities during wealth transfer planning. Take the role of alternative investments. Most alternatives are illiquid in nature and tend to have multiyear “lockups” that might make them seem ill fitted for the great wealth transfer. But a deeper dive tells a different story. Funding trusts for younger generations with alternative investments can support an aggressive, growth-oriented allocation, create opportunities for discounted asset transfers, and encourage beneficiaries to be mindful when it comes to spending and portfolio maintenance.

Executing a Smooth Wealth Transfer

The decisions underlying the great wealth transfer can impact generations to come and produce complex and emotionally charged reactions for those on both sides. But the right partner can make wealth transfer planning less difficult—and even fulfilling. Reach out to your Bernstein Advisor to learn more about evaluating the purpose, structure, and execution of a wealth transfer with an eye toward the future that follows it.