How to Pass Wealth Between Generations

Senior adult woman talking to her son.

This is definitely not your parent's retirement. Or your grandparent's.

Recently published studies from the Employee Benefits Research Institute (August 2012), Center for Retirement Research at College (June 2012) and the Urban Institute (February 2012) indicate that a large portion of the baby boom generation may not have saved enough for retirement. Many will not be able to afford to leave the workforce as originally planned - if at all - a stark difference than their parents.

Those born in the 20s and 30s were shaped by the trauma of the Great Depression; their assumptions and spending habits were formed by an era in which seemingly intractable deflation rewarded those who saved and punished those who spent or over-borrowed. Their offspring, the boomer generation, experienced the trauma of runaway inflation in the late 70s and early 80s. They learned the opposite lesson: inflation rewards borrowers and spenders-since tomorrow's dollar is cheaper than today-and punished savers.

So, how can members of the "Greatest Generation" best help their heirs? With careful planning. Transferring wealth can be a complicated process for families, made all the more complex by how each individual handles money, how the potential transfer affects the relationship, tax implications, and the ongoing financial needs of both the current and future beneficiaries. Navigating this challenge effectively tends to require the assistance of a number of trusted advisors who can address important legal, tax, insurance and investment issues.

From an investment standpoint, it is vital to make sure that the needs of the senior generation are protected as well. The golden rule is to implement annual distributions that amount to only a small portion of portfolio value, preferably less than 4% of the overall portfolio - particularly if the goal is to maintain its value over time. If the goal is to generate growth, the distribution rate may need to be even lower; this lower rate not only increases the amount of the portfolio that can remain invested, it also permits greater flexibility in terms of how that portfolio is invested. The less need there is for portfolio income, the greater the portion of the portfolio that can be invested for long-term growth in order to benefit future heirs.

In the same way, the impact of investment, income and estate taxes will need to be considered in order to make the most of both the current portfolio and the future transfer.

Societal trends are not the only reason one generation may need to consider the next when creating an investment strategy. Families often have specific issues that need to be addressed. For example, parents of a special needs child are often very concerned about their child's financial well-being into adulthood. Families may face other difficult challenges as well, such as an adult child suffering from a chronic illness, going through a divorce or wrestling with extended unemployment. Each of these cases may warrant specialized planning.

As part of that planning, the investment strategy for each component of the family's portfolio needs to be tailored to their specific needs and goals. In those cases which require immediate or ongoing assistance, the parent's portfolio may need to be restructured to support significant recurring distributions. In other cases, where the family is concerned to provide for the child's needs after the parents are gone, the portfolio may need to be structured to provide meaningful income over a very long period of time, warranting a greater emphasis on assets that offer both attractive long-term value and healthy cash flow.

While the potential transfer of generational wealth may be helpful in addressing the financial challenges ahead, it can also ironically amplify the problem. For some people, simply knowing that a future inheritance will supply the needed resources can lead to counterproductive behavior, which will undermine their efforts to build the asset base they will need. For this reason, it is important to recognize the unique inclinations of the individuals involved. When faced with beneficiaries who are prone to such behavior, it is critical to help them recognize that an inheritance is often only a potential gift-one that circumstances (such as chronic illness, etc.) may well diminish or deplete.

Transferring wealth can be intricate and must reflect each family member's specific needs and situation. While this entails consulting the family's legal, tax, insurance and investment advisors in order to design the needed plan, it also requires the implementation of a coordinated investment strategy that addresses the needs of both current and future beneficiaries.

Chris Chaney is vice president and financial advisor at Fort Pitt Capital Group, an SEC registered adviser located in Pittsburgh, PA. For more information, visit our website at