Preparing Clients for a Successful Wealth Transfer

The largest wealth transfer in modern history is officially underway. At the end of 2021, the Federal Reserve estimated that individuals aged 70 and greater had a total accumulated wealth of $37.79 trillion.

The exchanging of wealth on any level requires a certain amount of planning, and many families are not fully prepared when it comes time to bestow assets to a new holder. In a 2017 study by RBC Wealth Management, only 35% of inheritors were prepped by their benefactors to inherit wealth. The study also showed that benefactors planning to pass along assets with a full transfer plan in place were nearly twice as likely to express confidence in the future sustenance of their wealth’s growth.

Financial literacy is a valuable currency when wealth is set to change hands. In planning a wealth transfer, an advisor has an opportunity to play a crucial role in closing the knowledge gap and ensuring a fair, organized plan is executed.

Educate Inheritors and Benefactors

Financial knowledge is vital when transferring and receiving wealth to avoid potentially critical mistakes. Often, the parties involved in a transfer may have scarce financial knowledge or have never been exposed to the wealth transfer process before.

One of the most crucial financial aspects of wealth transfers are taxes. Performed incorrectly, the recipient may be responsible for severe tax implications. There are tax-avoidance strategies to transfer wealth, but strategies such as gifting, issuing loans to family members, or creating a Grantor Retained Annuity Trust (GRAT) often take time to create prior to the transfer.

Your clients may also have very limited knowledge of basic financial terminology or strategy. They may be unaware of various investing strategies, tax shelters, or approaches to holding liquid or illiquid funds. They may not be in tune with current financial market conditions. As their financial advisor, it’s your responsibility to transmit whatever information you think might be useful when communicating a transfer plan.

Emphasize the Importance of Communicating

You must also educate your clients on the importance of communication and planning especially early in the transfer process. Establishing a relationship as early as possible with inheritors allows advisors to lay a foundation of knowledge well before a wealth transfer takes place. This gives the advisor the tools they need to devise the appropriate strategy in accordance with the transferrer’s wishes.

When family discussions don’t take place prior to a wealth transfer, advisors must be willing to step in and facilitate them. The primary goal of these discussions is to allow both sides to set their expectations for the transfer. Advisors should educate inheritors on where the money for a wealth transfer is coming from and what type of money it is (i.e. an inherited IRA, a life insurance policy, etc.).

Be Conscious of Your Client’s Emotions

Advisors should also be discussing the emotional component of receiving an inheritance. The beneficiaries of the inheritance may feel fear when receiving the transfer. Though these clients may want to be good stewards of the money, they may also be paralyzed and afraid to mishandle the funds.

In addition, it is not uncommon for wealth transfer recipients to feel guilt or sadness. Wealth transferred from someone deceased will often not quickly disappear; it may act as a lingering reminder of the recepient’s sorrow or grief. In addition to property managing your client’s funds, be aware they may need emotional support during the transfer as they grapple with the loss of a loved one.

Advisors need to be prepared to help inheritors draw out and process the emotions surrounding an inheritance, so they can formulate a rational plan for using it. Oftentimes, inheritances are less about the money but more about the psychology of having lost a loved one and honoring their legacy through fiscal responsibility.

Build Your Client’s Confidence

Money remains a mystery for many Americans, and that can directly impact their financial confidence. Most Americans are unfamiliar with complex financial terminology, and this wealth transfer may represent the large sum of money your client will ever have.

The more inheritors know about the details of a wealth transfer and its implications, the more self-assured they may be in their decision-making. Instead of timidly tip-toeing around the inheritance, your clients can put that wealth to better use if they are more confident, informed of options, know what questions to ask, and can follow along when speaking financial strategy.

The Bottom Line

A wealth transfer—particularly one that’s unexpected—can dramatically reshape an inheritor’s financial plan. For advisors, the goal is to help inheritors maintain the right perspective both before an after a wealth transfer occurs.

Your client may be financially-savvy or new to the industry, They may have a financial plan in place or have no idea what the wishes of the deceased might have been. They may be confident and strong or insecure about finances and struggling with their loved one’s passing.

As financial advisor, your role is to shepherd your client and their portfolio through the unique challenges that arise when settling a wealth transfer.