Younger generations aren’t prepared for impending ‘great wealth transfer’

A historic wealth shift is underway in the United States, as younger generations stand to inherit an estimated $84 trillion over the next decade, with about $16 trillion expected to change hands in the coming 10 years.

The unprecedented “wealth transfer” poses both opportunities and challenges for recipients, many of whom may face difficult emotional and financial decisions.

Wealth transfer

“Receiving an inheritance can be an emotional time,” said Ashley Rittershaus, a certified financial planner in Revere, Mass. “[Inheritors] might make big emotional decisions quickly, like buying a house or an expensive car that they may not have thought through. Or they don’t take any action. Emotions can lead them either to do too much or not enough.”

Financial planners emphasize that heirs benefit from separating grief from financial judgment. Experts advise taking time to process a loss before making major money moves. Still, the sudden influx of wealth can test even the most level-headed beneficiaries.

“Depending on how much it is, newfound wealth can set up an inheritor for a long period of time,” said Tom Scanlon, a certified financial planner in Manchester, Conn. “It could also be gone quickly if the beneficiary develops a case of ‘Lamborghini fever.’”

Generational wealth

Instead of rushing into purchases, advisers recommend heirs integrate their inheritance into long-term financial goals. Reevaluating personal values and economic objectives can help them stay in control. Yet some inheritors fall into the opposite trap — doing nothing.

“A lot of people don’t know what they should do, so it’s easier not to make a decision,” Rittershaus said. “But that can be a problem: Since the inheritance was likely invested based on someone else’s financial situation, often someone older, the money may not be invested appropriately for you, if it’s invested at all.”

Large financial commitments

To avoid costly mistakes, some planners suggest waiting a year before making significant financial commitments. In the meantime, inherited cash can be placed in safe, interest-bearing accounts.

“For money you inherit in cash, you can hold it in a high-yield savings account or money-market fund,” Rittershaus said. “Alternatively, a low-cost money-market fund pays more.”

Beyond temporary savings, understanding tax rules is crucial. Appreciated assets such as real estate or stocks receive a “step-up in basis” at the time of inheritance, which can significantly reduce capital gains taxes if sold soon after. Retirement accounts, however, follow different tax rules, often requiring expert guidance.

Long-term goals

The biggest pitfall for young heirs may stem from their outlook on life.

“If they’re in their teens or 20s, it would be foolish to assume they’ll be smart with their [newly inherited] money,” said Marilou Davido, a certified financial planner in Whitefish Bay, Wis. “They want to live their life. They don’t think that far down the road.”

Davido urges young clients to consider long-term goals such as retirement. “When do you think you want to retire?” she asks, before reverse-engineering a financial plan.

“It’s getting them to work backward,” she said. “There has to be some kind of give there” to balance spending now with saving for the future.

Davido added: “That’s better than saying ‘You can’t touch that money.’”

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