How to navigate the 'great wealth transfer,' according to top advisors

Between Bill Gates’ pledge to give “virtually all” of his wealth away and Patagonia founder Yvon Chouinard’s recent decision to donate his entire company to fight climate change, it’s clear views of inherited wealth have changed.

Those high-profile pledges are happening as part of the greatest generational wealth transfer in history, with baby boomers set to pass to their children more than $68 trillion.

“It’s a generation that has accumulated a greater percentage of wealth that any other generation ever has,” said Mark Mirsberger, a certified public accountant and CEO of Dana Investment Advisors, No. 2 on this year’s CNBC FA 100 list.

“It’s a great opportunity. If they don’t plan for it, they don’t have to worry about it, the government will do it for them,” he said referring to how state intestacy laws will govern how assets are distributed without a will in place.

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Here’s a look at more coverage of CNBC’s FA 100 list of top financial advisory firms for 2022:

Here are four key considerations to help families prepare, according to CNBC’s top-ranked financial advisors. 

1. Life expectancy

2. Family legacy

The first hurdle is often bringing generations together to discuss their family legacy, advisors say.

“A lot of wealthy parents don’t show their kids what’s there,” said Alison Berman, president and CEO of Palisade Capital Management, which placed No. 56 on the FA 100 list. However, “you need transparency to plan,” she said. “We’ve been helping a lot of families navigate that.”

“One of the most important things is to make sure the next generation is comfortable handling the wealth they are about to inherit,” Keller said. “Parents have gotten used to managing their wealth over 20, 30 or 40 years; kids have less than a year.”

Sometimes not enough time is spent on the soft side of these family dynamics as opposed to just the numbers.

Rick Keller

chairman of First Foundation Advisors

For starters, “we try to get them thinking about what it means to be well off in this country,” he said. “Sometimes not enough time is spent on the soft side of these family dynamics as opposed to just the numbers.”

“Financial literacy is a huge part of this wealth transfer,” Mirsberger said. “You need to provide a lifetime of education.”

He added: “The next challenge is how you engage that next generation. You may not be able to connect with them.”

That means finding various ways to work with your heirs and get them to work with you. “That requires advisors to be a little more creative,” Mirsberger added.

3. Charitable intent

They want to use their assets as an agent of change.

Alison Berman

president and CEO of Palisades Capital Management

When it comes to their investment strategy, they tend to be more interested in broader trends rather than individual stocks, she also noted. “They want to use their assets as an agent of change.” 

To maximize a charitable plan, there are certain strategies that can help, such as creating a charitable remainder trust or charitable lead trust, which allow you to donate to the organizations of your choice, while providing a tax break to your heirs. 

4. Tax implications

Of course, any money that will be passed down must be subject to proper estate and tax planning, using tools like trusts and annual exclusion or lifetime exemption gifts, according to Will Williams, president and CEO of David Vaughan Investments, which ranks No. 40 on the FA 100 list.

The goal is to lessen the future tax liability and spare heirs much larger bills.

For the time being, taxpayers can gift as much as $12.06 million during their lifetimes without an up to 40% levy. That total is above and beyond the annual gift-tax exclusion, which allows you to make an unlimited number of gifts of up to a certain amount (in 2022, it’s $16,000) per person each year without incurring any taxes.

Those who are reluctant to make outright gifts could consider transferring assets into an irrevocable trust. One type, a grantor retained annuity trust, or GRAT, provides for annual payments to the parent for a fixed period of time before the assets go to the children or grandchildren as a tax-free gift. In fact, some of the nation’s richest people have leveraged this strategy. (There are also spousal lifetime access trusts, or SLATs, which allow married couples to create an irrevocable trust for the benefit of one another, while maintaining access to the assets.)

“The key is making sure you understand what it means for the next generation,” Williams said, as well as which strategy will work best for you. “It’s not a one-size-fits-all.”

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