In the coming decades, baby boomers will be passing on an estimated $30 trillion in wealth to their heirs, creating challenges for the financial advisory industry as well as for the baby boomers and their heirs.
But industry professionals warn that there are critical estate planning decisions to be made, particularly when it comes to long-term care.
The cost of long-term care, both burdensome and steadily increasing, has the potential to decimate estates. Despite this fact, few Americans are prepared with adequate long-term care insurance. Such insurance can be expensive, particularly for those with a history of health problems. Moreover, many people are loath to think of themselves needing long-term care, thus exacerbating the problem.
While Medicare provides limited long-term care coverage, patients may be forced to spend down their assets first. The nationwide median cost per month for a home health aid is $3861, while a private room in a nursing home has a median cost of $7698, according to an insurer. With costs at that level, it’s possible to wipe out an entire estate in a few years.
There are also other crucial estate planning issues to consider. For example, parents need to consider whether they want to leave money to their heirs, make charitable contributions or spend the money themselves. For those who want to pass on their money, trusts can be a useful tool. There are myriad ways to structure trusts to accomplish goals, as well as control how the money is spent. Trusts can also make it possible to avoid probate court, thus considerably reducing costs while maintaining privacy, and vastly reduce estate taxes.
As they begin to inherit wealth, the heirs of the baby boomers will face their own issues. One big question will be whether they maintain relationships with their parents’ financial advisors. Generation X heirs, born between 1964 and 1980, may be more inclined to do so than Millenials, says the Pew Research Center. Gen X individuals are reputed to be more independent and have less trust in financial advisors. Millenials, given the trend for helicopter parenting over the past 20-odd years, are commonly believed to be much more likely to stick with their parents’ advisors.
A survey by Investment News, however, says that 66% of children fire their parents’ advisors after they inherit. This may be because young adults can’t relate, given the aging of the industry. Research firm Cerulli Associates says that the average age for advisors in the US is 50, while 40% are over 55.
Older advisors also tend to come from the brokerage world, and their approach is centered on investment recommendations. Millenials want a more comprehensive approach, and view recommendations as something they can find online. As an advisor, it’s wise to keep up with technology and trends, and keep yourself relatable.
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Preparing for the $30 trillion great wealth transfer | CNBC