The largest transfer of wealth in modern history is beginning as the baby boomer generation — those born between 1946 and 1964 — plans for how the trillions of dollars they have accumulated will be deployed.

Baby boomers and older Americans have spent their lifetimes accumulating an extraordinary stockpile of money. At the end of the first quarter of 2021, Americans 70 and older had a net worth of nearly $35 trillion, according to Federal Reserve data. That amounts to 27% of all U.S. wealth, up from 20% three decades ago.

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“I think a lot of people in the older age group are very surprised by their wealth,” Nancy Knous, founder of Benchmark Wealth Management, said. “A lot of those people are baby boomers, but they were raised by the Greatest Generation who always lived on less than what they made, and boomers have seen that.”

Bob Bennett worked for FedEx for 35 years and retired as chief learning officer and vice president of human resources. He is amazed by what he has been able to accumulate and has a plan in place for leaving it to the next generation.

“As a kid growing up and as an adult and husband, I just saved money,” he said. “I tried to stay out of debt as much as possible, and that’s kind of why I’m blessed. It turns out somehow this transformation occurred, and now I have some money I can do something with.”

Chad Roberts, an estate and tax attorney with Harris Shelton, has seen a “significant uptick” in the number of people who want to get their estate planning in order since the COVID-19 pandemic began.

“It (the pandemic) woke a lot of people up,” Roberts said. “Older Americans are realizing they aren’t going to be around forever, and I think that caused a lot of people to start their estate planning.”

Implications of proposed tax changes

With impending tax changes and other factors, baby boomers are strategizing how best to leave their assets to the next generation as well as to nonprofits and charities.

Daniel Allen, CFP, a vice president, member partner and financial adviser at Red Door Wealth Management, said that while there may be some tax changes implemented, they will likely be watered down from some of the “extremes” that grab the headlines.

“You still have to be aware of those proposals, and you have to look at the families you’re working with and understand their situations,” Allen said. “You’re having the conversation with the family, letting them know what proposals are on the table. You’re not really doing a lot of action items just because you have to work within the confines of what the current laws are for the most part.”

Roberts has also observed clients who are giving away what they are comfortable parting with to see their children and grandchildren enjoy the fruits of their labor.

“One of the biggest proposals coming out is the capital gains tax,” Roberts said. “That would really hurt a lot of clients that I have because they won’t have the cash to pay the tax bill. That’s something concerning, but we haven’t done planning for it yet because we don’t have a final version of what the tax bill is going to look like.”

Under current rules, when an asset is transferred at death, the basis is stepped up to the market value at the time of death. If the heir sells the asset, the gain subject to tax would be the appreciation that occurred since inheriting the asset.

For instance, if someone purchased a house for $50,000 that is now worth $200,000, and the individual left the property to a beneficiary at their time of death, the beneficiary would not pay capital gains on the $150,000. Therefore, the gain of the asset in the hands of the decedent would never be subject to income taxes.

Dan Walker, CPA and senior tax director at Cannon Wright Blount, echoed Roberts’ sentiments about the implications of abolishing the step-up basis.

“I think one of the biggest things from a policy perspective is getting rid of the stepped-up basis on inherited property,” Walker said. “That’s one of the biggest changes from the atmosphere we’ve played in for as long as we’ve been in practice.”

The same applies to other assets, such as stocks. Under the proposed policies, if someone inherited 100 shares of Apple, he or she would have to pay capital gains on the difference between what the original owner of the stock paid compared to the market value today.

“Say, a mom and dad have a fourth- or fifth-generation farm and no other assets,” Walker said. “If their children or beneficiaries have to pay capital gains on the appreciation, there could be a situation in which the farm has to be mortgaged or sold to pay the capital gains tax on the land.”

There are also proposals being made to the lifetime exemption, which has historically been very high. A single individual can inherit up to $11.2 million without owing any federal estate taxes, which is 40%.

“One proposal basically gets it back down to about $3.5 million per individual and $7 million for a family,” Allen said.

Greg Haynes, CPA, says the issue of estate taxes will become more of a concern as 2025 approaches, and the Trump-era threshold for estate taxes “pretty much drops in half.”

“We haven’t seen a lot of taxable estates since it went from $5 million to $11 million,” he said. “Once that reverts back, people, I think, are going to give it closer attention.”

Despite likely tax changes, Mike Wages, CPA and partner overseeing tax at Cannon Wright Blount, stressed that tax should never be the driver of a financial decision.

“If your main goal is to minimize taxes, you’ll probably do something wrong,” Wages said. “People are thinking about going ahead and transferring wealth to the next generation. If I had a client and we were discussing this, I would say he or she needs to bring in the children early in the planning stages.”

Allen reiterated that point, adding that communication is key.

“If you want to give money to your family, which most people do in some capacity, it’s very important to communicate with the people you’ll ultimately give the money to,” Allen said. “The next generation needs to know how the wealth creator views the world, why it’s important to them and create trust and understanding.”

Gifting Options

Individuals can pass more on to their heirs today, without paying any federal gift or estate tax, than ever before in the past century. In 2021, anyone can give up to $11.7 million during their lifetime or at death without being subject to federal gift or estate tax.

“I think one of the biggest priorities for older folks is that they do want to bless their kids and grandkids, but even more of a motivation is that they don’t want to be a burden,” Knous said. “They don’t want their kids to take care of them because they likely took care of their parents, and they know how hard it is and how costly it is.”

Individuals can also gift up to $15,000 to another individual per calendar year without any tax implications. So, if both mom and dad wanted to gift a child and his or her spouse with early inheritance, the child and spouse could receive a total of $60,000 — $30,000 each from mom and dad — which could continue on an annual basis.

“We stress to utilize tax-free gifts, because that’s an opportunity to give a fairly large amount each year,” Walker said.

Knous said giving gifts now is a way to determine if a child or grandchild can handle the responsibility and is able to manage the money.

“In our practice, we’ve all heard the phrase, ‘Wealth has three generations — the generation that makes it, the generation that keeps it and the generation that spends it,” Allen said. “Our goal is to break that cycle.”

Other parents and grandparents are establishing 529 plans, which are tax-advantaged savings plans for future education costs.

“A gift is just that — you’ve given it away,” Knous said. “You don’t have control over what the kids do with it. A lot of parents and grandparents choose to take it out of their hands and put it in a protected plan.”

Bennett, the former FedEx executive, said his priority has always been to pass on his assets to his three children, but that has become harder with five grandchildren.

“What I’m doing now, and this has been for the last couple of years, is I am giving annual tax-free gifts to all three of my children, and I’m debating whether to add on an annual tax-free gift for my grandchildren,” Bennett said. “We’re also putting periodic money into college funds for the kids and doing other things to support them like taking them on a lot of vacations.”

Bennett and his wife are also helping their children with major purchases or events such as buying a home, remodeling or extracurricular activities for the grandchildren.

“We still want to leave them a halfway decent inheritance when we pass on, but we realize that giving and that support has to start early,” he said.

Nonprofits see uptick in donations

George Miller, vice president of institutional advancement for the Southern College of Optometry, said he is seeing an increase in gifts, particularly unrealized planned gifts.

“We’re seeing a larger increase in people who are making decisions to include SCO in their estate plans and letting us know while we haven’t realized the gift yet, we’re becoming part of someone’s plan,” Miller said.

Primarily, Miller is seeing more individuals adding SCO to their wills, allocating a certain percentage of their estate or a specific dollar amount to the institution. He has also witnessed an increase in donor advised funds (DAFs), which allow the wealth creator to take the tax benefit now and have the funds dispersed over several years.

Rex Jones, president of Christian Community Foundation, said the changes in the tax laws have created concern about what individuals are going to do in their lifetimes and after they leave in terms of finances and assets. It has caused families to reconsider how much they plan to leave to their children and grandchildren.

“I’m seeing a lot of people who want to develop a lifetime strategy to give to an organization while they’re alive and after they die,” Jones said. “The reality of the baby boomer generation now is, ‘What are we going to do as it relates to giving now and after our lifetimes? What will we give our children and what can we trust them with, and can they be good stewards of the material possessions that they have here on earth?’”

Jones agreed that many people are using DAFs to grow money tax-free and then give that money away over time to organizations.

“You can leave funds in your DAF with instructions to give to certain organizations in perpetuity — that money is now the possession of the public charity to give it away after you die,” he said.

Regardless of changes to the tax law, both Miller and Jones said that nonprofits and charitable organizations should prioritize providing donors with information on giving and help them to understand their options when it comes to passing on their wealth.

“The transfer of wealth is definitely something that nonprofit organizations have to start to prioritize,” Miller said. “Oftentimes, we get so focused on annual operating dollars on an ongoing basis and securing major gifts, but we need to allocate resources and marketing dollars to planned giving to be successful.”