With ‘the great wealth transfer’ underway, tools include life insurance, gifting strategies

The great wealth transfer is reshaping the financial landscape, as Cerulli Associates estimates that $124 trillion is set to transfer through 2048.  The implications for the financial services industry are vast.

Generation X ($39 trillion) and millennials ($46 trillion) will be inheriting substantial sums of money, while widowed women in the baby boomer and older generations will receive a projected $40 million in spousal transfers.

Northwestern Mutual’s 2025 Planning & Progress Study found more than 50% of consumers expecting an inheritance see it as “critical” to their long-term financial security. That said, studies show that 70% of affluent families lose their wealth by the second generation, and 90% by the third.

With the ongoing wealth transfer underway, there is a growing need for financial education and planning tools to preserve wealth across generations. Families must be able to protect and maximize inherited wealth through steps such as mitigating estate taxes, ensuring financial continuity for heirs, and supporting business succession.

Douglas Benson Jr., wealth management advisor with Benson Wealth Management, Northwestern Mutual Private Client Group, in Ankeny, Iowa, told InsuranceNewsNet that clients often struggle with spending and gifting due to concerns about running out of money. He uses strategies such as life insurance, irrevocable life insurance trusts and spousal lifetime access trusts to manage estate taxes and ensure wealth transfer.

Benson said between 60% and 65% of his clientele are business owners, with the remainder being W-2 professionals. They come to him for advice on estate planning as well as for advice on how to spend the money they have accumulated for their retirement while leaving wealth for the next generation.

Planning creates opportunity

“Any advisor worth a grain of salt can help you with an investment strategy or sell you some type of insurance contract,” he said. “But where does that fit in the context of what you’re trying to accomplish, and what are they helping you with outside of the obvious? So the true advisor alpha, in my opinion, comes through planning. And through planning, you create a lot of opportunity.”

Clients who are retirement age and older find it difficult to spend the money they amassed during their working years, Benson said, because they worry about running out of money. And it doesn’t matter how much money they saved. “We have clients with enough capital to support many generations, and they’re still worried about running out of money. And they struggle to spend it.”

Financial planning can give these clients clarity on how much they can spend while still leaving something to their children and grandchildren.

“We also share with them that the utility of money goes down as we get older,” he said. “So sometimes it’s not the best strategy to die at 100 and leave a big tip on the way out. If you lie to be 100, your kids might be around age 70. If they’re anything like you, they’re probably going to be good savers, and they’ll appreciate the money, but they may not need it. But when your kids are 30 and they have young children, and daycare costs five grand a month, and health insurance is $1,500 a month – if we can start thinking about gifting today, while you’re alive and your kids are relatively young and the utility of capital to them is extremely high, they will really value it and you’ll get to see them appreciate it.”

Planning is at the heart of wealth transfer

Planning is at the heart of a wealth transfer strategy. Benson said the plan begins with making sure the client will have enough money for life. After that, it’s time to employ a strategy to transfer wealth to the next generation. Life insurance is one such strategy.

“The beauty of life insurance is if you have a $5 million death benefit, for example, that gives you the permission to spend down more of your money freely, knowing that when you’re dead, you’re going to leave $5 million to the kids regardless of how much money you have left,” he said.

An irrevocable life insurance trust or a spousal lifetime access trust are other wealth transfer strategies.

“When we locate the life insurance outside of the taxable state, we have that $5 million and now that $5 million is outside. If you have assets that are in your taxable estate, the life insurance tax is a good financing mechanism to pay the estate tax, so your kids don’t have to sell assets to pay the tax,” he said.

Other tools to transfer wealth

Other wealth transfer tools that Benson employs include:

• The annual exclusion, currently at $19,000. “Sometimes a client says they want to help out a child with a down payment on a house, for example, so they’ll just gift them cash.”

• Appreciated securities. “If we’re managing their nonqualified investment portfolio, we’ll go in and cherry-pick a security with a low basis, highest amount, a lot of appreciation. And if we gift that to their child, and we’re working with the child and their CPA and we identify that they’re in a 10% to 12% tax rate they can gift that security and the kid sells it. And if they’re in a 10% to 12% tax rate, they don’t pay capital gains tax.”

• Revocable trust. “It’s a powerful tool to keep assets out of probate.”

Benson advised working with the client’s attorney and accountant to plan for income tax and estate tax. “We’re here to orchestrate the plan, come up with ideas, be the thought leader, then ultimately bring in the estate planning attorney and the CPA to make sure we’re all working together as a team to ultimately put the client in the best position.”

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