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You own a home, maybe two. You’ve amassed a sizeable nest egg, even as you continue to set professional goals. And you spend most weekends spoiling your grandkids or hope to soon if your millennial offspring ever settle down. Welcome to the “wealth transfer zone.”
Indeed, your financial picture looks vastly different during the pre-retirement years than it did when you were just starting out. With a lifetime worth of savings at stake, it’s critical that retirement savers put plans in place to protect their assets, interests, and future legacy.
The wealth transfer zone is not defined by net worth or even a specific age, but rather begins when your investment priorities start to shift from asset accumulation to wealth preservation. Often, it is marked by major milestones, like the birth of a grandchild, start of a second career, or sale of the family business.
“To help ensure assets last a lifetime, and protect the ones they love, it is imperative that individuals in the wealth transfer zone assemble the right team of advisors to guide them,” said Joe Rokowski, president of the MassMutual Trust Company, FSB, the private client services subsidiary of Massachusetts Mutual Life Insurance Company. “Many people can and will influence mature affluent clients to include attorneys, tax professionals, adult children, financial professionals and advisors, and even close friends. Individuals need to be thoughtful and deliberate as they assemble a team of credentialed and trusted professionals as this group will be responsible for managing, advising, and ultimately helping clients transfer assets to the people and causes they care about.”
The wisdom of wealth planning
Wealth planning involves a comprehensive review of all the decisions that affect your finances as you progress into retirement, from housing choices and eldercare options to investment strategies and charitable goals. It also, of course, seeks to ensure that all estate planning documents are in place to protect your interests in the event that you become incapacitated, and ultimately provide for the tax-efficient transfer of assets to the next generation.
Wealth planning is a dominant trend in the financial planning industry today, as some 111 million baby boomers (born between 1946 and 1964) shift their focus from wealth accumulation to the preservation and transfer of assets to their loved ones — and to causes they care about.
“The risks of poor planning are significant,” said Rokowski. “Absent specific guidance on how you wish your money to be used, and your wishes for end-of-life health care, your loved ones would be forced to guess at what you would have wanted in the event you become incapacitated or pass away, a burden that often leads to infighting among heirs and inefficient transfer of wealth.”
You don’t want your heirs and loved ones to be making major financial decisions at the wrong time and for the wrong reasons. (Learn more: Estate planning mistakes)
“The standard advice when someone passes suddenly is to not make any significant decisions, like buying or selling a house, in the first year, but if you don’t have a plan in place, the surviving spouse or kids are forced to figure it all out on their own,” said Rokowski. He noted beneficiaries in this case, who are already emotional over their loss, are more likely to make knee-jerk (and potentially costly) decisions about the assets they inherit.
The stakes are potentially higher for blended families, in which both spouses may have children from a prior marriage. Yet very few families have taken steps to ensure their wealth will pass seamlessly to their heirs.
Less than half (46 percent) of Americans have a written will that describes how they want their money and estate to be distributed after they are gone, according to a 2021 Gallup poll.1
A timeline for wealth planning
Effective wealth planning differs for each individual, depending on his or her unique financial picture and where they are in the wealth transfer zone.
During the pre-retirement years, for example, affluent families can begin the process of wealth planning by working with their financial professional to create a visual “road map” to identify significant issues and milestones ahead.
Key considerations at this critical life phase also include developing a comprehensive estate plan and vision for their lifestyle after retirement. “They can then begin the process of retitling assets as needed and consolidating their accounts and critical documents, which may include a living will, power of attorney, trusteed IRA and donor-advised fund, to simplify the future transfer of wealth,“ said Rokowski. (Learn more: Is a trust right for you?)
Wealth transfer planning prior to age 65 may also involve business succession planning and an analysis of health care and long-term care expense risks.
In the early years of retirement, affluent individuals should weigh the impact of a possible encore career or new business venture on both their financial and wealth transfer plans, and ensure their existing lifestyle, health care, and legacy plans still reflect their stated goals.
Passing wealth on
“Later, as they settle in for the long haul, they may wish to conduct final planning, and, if desired, begin the process of transferring assets and/or control of their estate to their beneficiaries,” said Rokowski. They should review the strategies they will use to transfer wealth, and discuss that plan with their heirs and wealth planning team, including their financial professional, estate planning attorney, eldercare specialist, corporate trustee, investment manager, accountant, and philanthropic consultant. And, they should consider how non-divisible property, such as artwork, jewelry, and collectibles, will be bequeathed.
Bear in mind, the process involves far more than merely dollar signs.
“Money is just one piece of the puzzle,” said Rod Skaf, a financial professional with Lighthouse Wealth Solutions in Dublin, Ohio. “Transferring wealth is not just a quantitative matter. You also want to ensure that you transfer your values, beliefs, and work ethic.”
Done correctly, a wealth transfer plan conveys your goals for future generations and clarifies the conditions upon which their inheritance will be distributed. It may also earmark causes and charities that will benefit from your estate, to ensure the family’s philanthropic legacy lives on.
“And, it should include the story of how your wealth was created,” said Skaf. The majority of affluent families, he noted, accumulated wealth through hard work and disciplined savings, and they have much wisdom to impart. A wealth transfer plan provides a platform for doing just that.
“It’s important to share your story,” said Skaf. “Chances are you didn’t find your money on the street, so how did you build your wealth? Was it through real estate, or investing in stocks? Did you save diligently for 30 years? For most, it involves a combination of education, time, and hard work.”
“If they are to be good stewards of the money they inherit, and adopt the ethics and attitude that helped their parents succeed,” said Skaf, the next generation needs to know.
Of course, loved ones must also understand the nuts and bolts of the plan.
“Communicating the wealth plan to your heirs and centers of influence, including your CPA and attorneys, is critical so everyone is on board and understands their role. It also gives them a chance to ask questions, which can minimize the dysfunction that can happen after you die,” said Rokowski. (Related: How to make sure your heirs won’t fight)
Finally, during the sunset years, Rokowski recommends high-net-worth individuals address caregiving issues as mental and physical health declines, and ensure their end-of-life treatment plans are in place. They should also engage with spouses, heirs, and centers of influence to ensure everyone is well-versed and prepared to ensure a smooth transition of wealth. It is during these years, when the heirs begin implementing the wealth transfer plan, that all those years of financial preparation pay off.
Keep in mind, however, that a wealth transfer plan is not a static document. Rather, it must be monitored regularly and updated with every major life event, including a birth, death, or divorce, or a change in financial circumstances. By working closely with a trusted financial professional, affluent individuals in the wealth transfer zone can help protect their assets and interests, and ensure their legacy for future generations.
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This article was originally published in September 2017. It has been updated. Joe Rokowski has retired since initial publication.
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1 Gallup, “How Many Americans Have a Will?” 2021.