The estimate currently sits at $68 trillion dollars that the Baby Boomers will pass on to the next generation. For most of those 45 million households, this substantial financial legacy carries with it the hopes the assets will be used in a manner that reflects the values of the people who generously passed it down. Baby Boomers, like other generations, have a diverse range of attitudes and beliefs about money.
For example, many Boomers say that they appreciate the benefits created by their hard work, beyond just their monetary price tag. Studies have shown when asked what the most important thing is to pass on to the next generation, the number one answer by a clear margin was “values and life lessons.” Believe it or not, the answer “financial assets and/or real estate” came in last place. The answers “instructions and wishes to be fulfilled” and “personal possessions of emotional value” finished in between.
Chris Heilmann, Chief Fiduciary Executive of U.S. Trust, spoke about passing down financial values as a key part of your legacy: “I’ve been in this business for 41 years working with families, and from my experience, if wealthy people are faced with a choice of being able to hand down their money or their values, but not both, they’d want to hand down their values.”
Show Me – Don’t Tell Me
So, how do you do it? There are many ways to pass financial values on to the next generation. Think about the old phrase “Show me – Don’t tell me.” Ask yourself, do your actions and your values show up in your everyday life? Do you handle money in a way that you want your descendants to handle it?
For families with children, parents are the primary role model for how to think about and manage money. Modeling the behavior you would like your children to emulate is the best place to start.
If you value hard work, ask yourself – do your children see that? Or, do they get everything they ask for? Young children can earn an allowance doing chores or helping neighbors. If always living within your means is important to you, then older children may be expected to pitch in on a large purchase, so they understand the concept of saving money for big-ticket items. I made my son kick in on a gaming system he couldn’t live without.
Put It In the Plan
In some cases, the older generation withholds information about their true net worth so that their descendants will learn to be self-sufficient, which is an excellent goal. However, if something unexpected should happen and a large amount of wealth is handed down suddenly, it’s unlikely the inheritors will have the skills and understanding of how to handle them appropriately.
One way to prepare them for this is to write your estate plan in such a way that your family does not receive all their inheritance at once, but rather gains access to it at different ages as they get older and become more responsible.
Some Boomers are passing down financial values by making investments in companies, organizations, and funds with the intention to generate social and environmental impact. “Impact Investing” isn’t that new but is an ever-increasing area of financial and investment management. Impact Investing is using your investments to both achieve financial return and for broader societal or environmental impact.
According to a recent 2018 Global Impact Investing Network Survey, investors committed more than $35 billion to impact investment deals in 2017, a 58 percent increase on the previous year; while total impact assets of its respondents were $228 billion, double the 2016 total.
Leaving a Tax-Smart Legacy
Tax-efficiency is also a concern when it comes to leaving an inheritance for loved ones and for donating to organizations that reflect your values.
A donor-advised fund (DAF) could be best described as a charitable investment account that provides simple, flexible, and efficient ways to manage charitable giving. The money or assets that go into a donor-advised fund becomes an irrevocable transfer to a public charity with the specific intent of funding charitable gifts. This public charity serves as the administrator of the DAF.
When you contribute cash, securities or other assets to a DAF at a public charity, you are generally eligible to take an immediate tax deduction and potentially eliminate capital gains on the contributions. Then those funds can be invested for tax-free growth and you can recommend grants to virtually any IRS-qualified public charity. As with all financial decisions of this type, please check with a qualified tax advisor before setting up a DAF.
As you can imagine, your heirs would probably prefer to inherit non-IRA accounts, because they won’t be taxed or have to deal with RMDs (Required Minimum Distributions). Qualified charities, on the other hand, don’t care what type of account you leave them. Why? As non-profits, they usually won’t pay tax on any legacy you leave them.
Remember, if you want to leave money to your family and donate to charity, you should talk to a professional about being tax-smart and willing your non-IRA taxable account to your heirs and your IRA to a non-profit, to maximize the good your financial legacy can do.
The key takeaway: put some thought into your legacy and develop a strategy. My strategy is to frequently look for ways to drop hints about my values. Also, I try to mention things I admired about my parents, in-laws, and grandparents.
When talking to your kids about being grown-ups, you might want to ask them how will they act as a role model for your grandchildren? If you have been on your game long enough, you might just hear about some of your values that they’ve seen you model over the years.
This material is provided for general and educational purposes only, and is not legal, tax or investment advice. For each strategy or option mentioned, there are detailed tax rules that must be followed.