As the asset and cash rich ‘baby boomer’ generation nears retirement, their millennial children look set to receive as much as $68 trillion (Source: CNBC) across a broad range of assets. Yet the two generations have vastly different attitudes, understanding of and approaches to their finances. How can robust planning ensure wealth is transferred efficiently to the next generation, in a way that gives them the freedom to live a self-determined life?
The ‘baby boomer’ generation, who are aged 58 to 76, are nearing retirement or planning how their wealth will be distributed among their ‘millennial’ children, who are aged 26 to 41. 81% of boomers plan to leave their children an inheritance1 and, considering this cohort currently controls 70% of all disposable income globally, it will be a mammoth task to preserve and transfer this tidal wave of wealth.
For some families, a simple will can ensure their sole asset, like the family home, is passed on without complications. But for those with significant wealth or assets, or family businesses to consider, effective succession planning is a more complex topic.
To make matters even more difficult, boomers and millennials have very different attitudes towards the way they use and manage their wealth. Could variable universal life (VUL) insurance hold the key to bridging the generation gap and smoothing the great wealth transfer?
The complexities of succession planning
Succession and inheritance planning always requires a significant amount of thought. Inheritance tax receipts totalled £5.2 billion2 during the 2019/2020 financial year, having more than doubled over the course of a decade. Consequently, families with a significant net worth could face huge tax bills if they fail to plan for an efficient transfer of wealth. Although it is an extreme example, the Samsung-Lee family’s staggering 12 trillion won (around €8.3 billion) tax bill3 shows just how significantly wealth can be impacted in the worst-case scenario.
Additionally, in cases where one child mutually agrees with their siblings to take over the family business, finding an equal inheritance solution for the other children can be difficult. Even for a family that is both cash and asset-rich, simply writing cheques equitable to a multi-million-euro asset is not a practical or potentially even realistic option.
And while even the most robust planning probably would not have been sufficient to mitigate the impact of the Samsung-Lee bill, liquidity planning can help most HNW families offset any inheritance tax costs. A VUL would ensure you’d have enough money to cover the bill without needing to liquidate assets, which may hold sentimental or professional value.
A different approach to using wealth
One of the most complicated aspects of this intergenerational wealth transfer is just how differently millennials and their baby boomer parents approach financial matters. According to CapGemini’s Wealth Management Top Trends Report 20224, the boomer generation trusts chosen financial advisors as their sole source of advice. Their investment and business strategies have been largely focused on building their own wealth and business ventures.
In contrast, millennials prefer to seek broader professional counsel and carry out their own research before settling on a financial solution. Younger people are also more likely to prioritise putting their wealth towards “their purpose in life”, which could cover everything from professional fulfilment to pursuing non-profit ventures.
Transferring illiquid wealth
While baby boomers do hold significant cash reserves, the FT predicts that property will account for 70% of transferred wealth between generations2, meaning much of their wealth is illiquid. It may be tied up in homes, which are likely to have appreciated significantly since they were purchased, or large family estates, which have a complex line of succession.
The older generation may also have shares in their places of work (for example, if they are an executive at a large company), or private pensions. But perhaps the most complicated scenario is if a parent does not have a sole stake in their company, meaning it cannot automatically be sold or passed on in the event of their death.
Setting the next generation up for success
Another factor that could complicate matters for both generations is the lower levels of financial literacy among those who stand to inherit significant wealth. Forbes reports5 that 28% of millennials have ‘very low’ financial literacy, meaning they may struggle to use their inheritance funds for their chosen purpose if they are tied up in illiquid assets.
Liquidity planning gives the next generation access to a liquid inheritance without needing to go through the confusing and potentially drawn-out process of liquidation. Once the benefit of the VUL is received by the family, each beneficiary can enjoy liquid cash that allows them to live a life of their choosing – for example they may wish to continue the family business, create a new business or pursue charitable ventures.
Individuals are looking for inheritance solutions that will support their beneficiaries’ choices and minimise the amounts that are lost to bureaucracy, succession rivalries or poor financial choices. With Swiss Life Generations, a VUL insurance solution, you can create high liquidity to ensure your estate is distributed fairly and that the next generation are financially equipped to live self-determined lives.
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