The intergenerational transfer of wealth from aging grandparents and parents to their heirs is loaded with uncertainties. Factors such as increasing longevity, rising health-care costs, taxes and uncertain market conditions can have an impact on the value and the timing of the wealth transfer.
It is therefore necessary for financial advisors to take these variables into consideration and work with clients to establish realistic expectations regarding the amount they might inherit.
Matthew Williams, senior vice president and head of defined contribution and retirement at Franklin Templeton Investments Corp. in Toronto, questions whether “people are spending enough time planning for the transfer of wealth.”
Williams sees an opportunity for advisors to assist their clients in areas such as preparing wills, formulating estate plans and establishing trusts. Advisors should “focus on baby boomers and their parents” to implement strategies to manage the transfer of wealth.
“You have to take a holistic view and, where appropriate, involve the siblings of your [inheriting] clients,” Williams says. He notes that siblings might already have their own advisors, which can make planning more complicated.
Below are some of the uncertainties your clients should be aware of regarding the transfer of wealth:
> Increasing longevity
People are living longer due to healthier lifestyles and advances in medical care. The average male is now expected to live to about 88 years of age and females are expected to reach almost 90.
These senior clients will be using up a greater portion of their retirement savings, leaving less to be transferred to their heirs. Advisors will therefore have to implement investment strategies to accommodate longer life expectancies, taking into consideration the unique circumstances of each individual.
> Growing health-care costs
The rising cost of health care can absorb a significant amount of the funds that might be available for intergenerational transfer.
“Canadians tend to underestimate the cost of providing health care, which increases as people age,” Williams says.
In order to get a better sense of potential health-care costs, ask whether the family has a history of certain illnesses, such as Alzheimer’s or dementia. Consider the cost of long-term care (LTC), which is increasing, and whether the clients have any LTC insurance coverage.
> Taxes payable upon death
A significant portion of your clients’ inheritance can be absorbed by taxes. Payparticular attention to taxes payable on registered retirement income funds and deemed disposition of property, as well as probate fees, which vary by province.
As well, Williams says, if your clients own property in the U.S., you should take note of taxes payable on the disposition of that property. Appropriate life insurance coverage, he advises, could be acquired to offset these taxes.
> Economic uncertainties
Changing market conditions and interest rates could have an impact on the value of your clients’ assets at the time of transfer.
Older parents typically invest in fixed-income products to generate income. Such products limit the growth of their assets, while low interest rates could also result in faster depletion of fixed-income assets.
Although inflation is low now, higher inflation in the future could erode the value of assets.
See: Managing the wealth transfer
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