I have written on the Great Wealth Transfer many times, but the latestWealth-X report titled “A Generational Shift: Family Wealth TransferReport 2019” along with an article in Forbes by Garrett Gunderson titled“How the Ultra-Rich Never Die” caught my interest and generated some thoughts that I want to share.
To summarize, by the year 2030:
- 322,260 individuals with net worth between $5-$30 million will transfer $3.301 trillion;
- 34,220 individuals with net worth between $30-$100 million will transfer $1.769 trillion; and
- 9,920 individuals with net worth over $100 million will transfer $3.738 trillion.
What happens in the next 11 years will be very interesting to observe as Generation X, for the most part, and Generation Y (the Millennials) to a lesser degree, inherit this massive amount of wealth. Why? Because, as the Wealth-X report states, “what comes across clearly is that the members of this group differ from the generation before in their outlook and the way they manage their daily lives”. One of the key comments in the study regarding differences is that “many of those preparing to pass on their wealth have long focused on what they will leave to the world. The next generation, however, are displaying a clear step change in emphasis. Wealth preservation continues to be important, but they are also noticeably concerned about the impact their wealth will make on the world, society and the environment.”
Finally, the report concludes that “those passing on wealth and their beneficiaries share a common concern – shaping and building the family’s legacy via philanthropy. Moreover, families are becoming aware that philanthropic planning can have other benefits – bringing them together, increasing cohesion and getting the next generation on board when considering non-financial matters.”
This leads me to Mr. Gunderson’s article in Forbes. He basically concludes that the Ultra-Rich never die because instead of investing in the stock market – which they don’t control – they invest in their future heirs. He states that “instead of trying to build assets and take a massive risk on an inheritance or trust plan, they invest in the talents, interest, abilities and skill-sets of those they choose to be the one to carry on and benefit from their legacy”.This dovetails with the conclusions of the Wealth-X report in that it brings to the forefront that it’s not all about the money.
Mr. Gunderson’s article continues ….
“When we do this, it allows us to be more adaptable and flexible concerning the future. And because we don’t control the economy, we don’t know what inflation is going to be, and tax changes are inevitable, then you’ll have an “insurance” on your heir(s) that is permanent in nature. This will make it so when they also pass on – even if they didn’t grow the trust – if they just grew themselves and engaged their purpose and understood their contribution to the world, then it’s at least replenished upon death through the life insurance. So instead of taking risk with assets and things out of their control, it is about who they are.”
If you read between the lines, Garrett Gunderson is making a huge argument for why wealthy families own and take great care to properly structure permanent life insurance across generations. This essentially creates a family bank which is continually replenished generation after generation regardless of how the markets and other assets do or how subsequent generations decide to pursue their own lives. However, and equally important, is that the senior generation take the time to impart on their heirs a value system and philosophy that allowed the family to achieve its wealth in the first place, so that “they are a signpost for future generations”.
Providing a platform in which heirs can pursue their own interests, careers and passions, which by the way, may be very different than their parents or grandparents, is okay. With that said, providing leadership, education and values starts at the top. I was on the phone recently with an advisor who had been called in to help a gentleman in his 60’s who was worth close to $50 million. The gentleman is divorced and has one child – a 19-year-old son. His son had just informed his father that he was not going to stay in college and had decided that he was going to be a locksmith and eventually start his own company. The client was struggling with how to pass on his complex real estate and business empire to his only child. Is it wrong that the son wants to pursue being a locksmith because his dad is wealthy? Aren’t there more lessons to be learned from the father regarding “wealth” than just the complex real estate and business empire that he created? And in all likelihood, the father amassed this wealth in a field that was probably very different than the career path that his father (grandfather) had chosen.
As Mr. Gunderson and the Wealth-X report discuss, the inheritors of the so-called Great Wealth Transfer are different than the great creators of wealth that are the Baby Boomers. We need to understand those differences but more importantly we need to begin addressing these families before wealth changes hands, as you, a financial advisor, risk becoming irrelevant. The opportunities to advise these families and provide well thought out insurance solutions to perpetuate long term family wealth is NOW. The Wealth-X report, in its conclusion, provides several best practices to ensure that wealthy clients and YOUR organization are prepared to have these conversations.
AgencyONE has created a multi-generation family bank concept and financial model that explains this in an easily understandable manner and can help you have meaningful conversations about this subject but learning how to address these changing needs in a non-financial way will forever change your practice.
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