Increasing number of U.S. households prioritizing wealth transfer

Nearly two thirds of U.S. households are now involved in intergenerational wealth transfer, with growth seen in both wealthy households and lower-asset households.

This is according to The Wealth Transfer: Business-building Strategies as More Families Engage With Inheritances and Trusts , a report by Hearts &Wallets.

The survey said that of the 129.4 million total U.S. households, 79 million (61%) have received, expect to receive, or leave an inheritance, up from 58 million (46%) in 2015. The biggest increase is in households that expect to leave an inheritance, 49.4 million in 2022, up from 34.4 million in 2015. Bequests in the next 20 years are estimated at $17.5 trillion.

Why the increase in inheritances?

The increase in households, especially in lower-asset households, is partly because of the transition from defined benefit to defined contribution plans, explained Laura Varas, CEO and founder of Hearts & Wallets.

Under defined benefit, she said, households receive an income stream, which usually continues for the surviving spouse but does not get passed on to the next generation or charities. Under defined contribution, households accumulate assets titled in their own names, which they turn into spending money during retirement.

Since “end of plan” date (i.e., life expectancy) is uncertain, it is prudent to plan to have some remaining assets. “That’s where financial advisors come in,” Varas pointed out. “They can help households understand how to spend down assets in their later years to meet income needs and legacy desires.”

Wealth transfer is happening at older ages

Wealth transfer is also happening at older ages than in the past, according to the survey. About half of inheritances (52%) are received when the recipient is age 55-plus, up from 41% in 2015. Most inheritances received are under $500,000, but 13% are over $500,000, and 1 in 20 is $1 million-plus.

One reason wealth transfer is happening later is that Americans, in general, are living longer than they did 20 or 30 years ago. As a result, wealth transfer between generations often happens when children are older, Varas said.

The role of advisors in legacy discussions

Most households want to discuss their legacy with their heirs. Financial advisors can be important neutral facilitators to help families with legacy discussions, Varas said. “In our qualitative research, investors who want to leave an inheritance have told us they want their family discussions to include the location of important documents and financial paperwork, and how much money they have,” she said.

Financial advisors should ask about expectations for legacies and inheritances during client conversations and ensure that CRMs (customer relationship management) systems have appropriate fields about wealth transfer, Varas said. The research finds that men are more likely than women to want to talk to heirs about planned inheritances, she added.

Working with recipients of larger inheritances

According to Varas, recipients of inheritances of $500,000-plus are more likely to be found in four areas than in other areas of the country:

• •New York metro
• Los Angeles metro
• Chicago metro
• Boston metro

There are shared characteristics – demographic, attitudinal and behavioral – that recipients of larger inheritances share, Varas added. These households feel more experienced with investing, are heavier users of taxable brokerage and have more net equity in real estate than the national average. “In addition,” Varas said, “they are twice as likely to have “demands on my time,” which lead them to delegate and also value a wide variety of investment products.

But they have more difficulty in determining a strategy to withdraw income, Varas pointed out. “Use of profiling, such as targeting for households that have received bigger inheritances, can help advisors to better understand households that are receiving inheritances,” she said.

Use of trusts for wealth transfer

In addition, the survey revealed that only1 in 4 households has funded accounts registered to trusts. “We were surprised by the low penetration for households age 55 and up,” Varas said. “Many of these older households have significant assets in taxable accounts and would be greatly helped by the protection of trusts as their owners age.”

For example, she said, nearly half of households age 55-plus with $500,000-plus that do not have trusts have 40%-plus of their assets in taxable accounts. “Together, she said, “these two facts show that supporting trusts is a lot more important than many consumers and those in the industry appreciate.”

Most households with a funded trust have not received an inheritance, she added, suggesting that the trusts are revocable ones for their own benefit. The many inheritances that do not involve trusts suggest they are inherited IRAs (which cannot be put into trusts).

The report draws upon the Hearts & Wallets Investor Quantitative™ Database (IQ Database). The latest survey wave was fielded from August 15 – September 15, 2022, with 5,993 participants.

 

Ayo Mseka has more than 30 years of experience reporting on the financial services industry. She formerly served as editor-in-chief of NAIFA’s Advisor Today magazine. Contact her at [email protected]. 

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