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Over the next 20 years, Baby Boomers will transfer an estimated $84 trillion to their Gen X and Millennial offspring.1 This “Great Wealth Transfer” impacts benefactors and beneficiaries alike, with the first considering how their estate plan serves their needs and goals, while the latter navigates the financial impact of their inheritances.

“There are many variables that need to be considered while working through your estate plan,” says Javier Vega, Wealth Management Officer with Byline Bank. “You will need to consider what to gift to who, how to do it as tax efficiently as possible, and how much control you still want to maintain even after they inherit.”

Planning also entails preparing the younger generation by improving their financial literacy regarding investments and tax strategies. A proactive approach to planning, education and even family conversations benefits everyone, helping ensure a successful transfer while preserving the wealth for future generations.

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A prime planning window

Creating and updating an estate plan is always a smart idea; however, it’s especially relevant now. That’s because the lifetime gift and estate tax exemptions, which doubled in 2018, will sunset at the end of 2025. The lifetime estate tax exemptions are set to revert from $12.92 million for individuals and $25.84 million for married couples (inflation-adjusted) to about $7 million for individuals and $13 million for married couples.2

“It’s always a good time to review your estate plan, but doing so now ensures you are taking full advantage of the historically high gift and estate tax exemption,” says Vega. “You can lock in those exemptions even if they revert back to their pre-2018 amounts.”

The pending change may impact gifting and wealth transfer strategies as families look to take advantage of the bonus exemption before it ends.

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Critical considerations for benefactors

The potential exemption shift may motivate Baby Boomers—the current wealth holders—to design or update their estate plans. In the process, there’s an opportunity to build strategies that lead to efficient and effective generational wealth transfer. “It’s worth looking into certain strategies if you’re concerned about maximizing how much you leave behind to beneficiaries by reducing your estate tax obligation,” Vega says. There are multiple trust vehicles that individuals and couples can deploy to reduce their tax obligations and establish various levels of control over their asset transfer.

By working with an advisory team, you can develop a plan for multiple purposes, with tax efficiency as the foundation. As you evaluate your plan for tax efficiency, consider addressing other equally important considerations, such as:

  • How you want to facilitate your wealth transfer
  • The amount of control you want to maintain
  • The cash flow required to sustain your lifestyle
  • Other goals that you have for your wealth, including philanthropic activities
  • The involvement you want the next generation to have in planning for the wealth transfer

There’s no one right approach to your estate plan. Instead, strategies vary based on the complexity of your assets, the needs of your family, and your ultimate goals for your wealth and your beneficiaries.

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Preparing the next generation

As you determine how to create an effective estate plan that meets your needs and achieves your goals, you’ll want to consider the impact on the next generation.

“One of the most important aspects of passing on wealth is financial education,” Vega says. Younger beneficiaries (likely Gen X and Millennials) often appreciate additional education about investment vehicles, building net worth, tax brackets and more. This is especially relevant if the older generation plans on implementing an annual gifting strategy as part of their estate plan.

“Annual gifting to loved ones, if it makes sense for you, will give you a glimpse into how they may handle inheriting wealth,” Vega says. “This will show you if you need to keep some control, or if you believe they are ready to handle things on their own.”

Regular family meetings, individual conversations and sessions with wealth advisors can all help educate the younger generation. And while, ideally, the learning takes place over a span of years, families can begin at any time and adapt or accelerate the process to meet their timeline.

“It’s all about preparing the next generation for their future,” Vega says.

A collaborative, transparent approach

Building a plan for generational wealth transfer is an understandably complex endeavor. An understanding of family dynamics and a commitment to transparency can help families navigate some of the potential issues—and avoid significant tension. In this context, collaborating with your advisors is also essential.

“Bringing in your trusted advisors to learn more about your family’s situation and complexities makes a big difference. We can have these conversations with you and your loved ones to make sure everyone is on the same page regarding what’s important to you. That’s a lot of what we do,” Vega says.

The Great Wealth Transfer presents the chance for families to consider how they can preserve their wealth across generations. By examining your estate plan with an eye toward what each generation needs, you can ensure everyone involved is engaged and prepared for success.

Do you have questions about your estate plan or the sunsetting exemptions? Connect with Byline Bank’s Wealth Management team today.

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