The Economy

The Great Wealth Transfer is Here … Now What?

A massive migration of assets from the baby boomers will have a dramatic impact in virtually every industry.
Brian PeccarelliMay 8, 2017
The Great Wealth Transfer is Here … Now What?

This year, the oldest members of the Baby Boom generation crossed a crucial threshold. They turned 70.5 years-old. Why does that matter? U.S. law currently requires anyone 70.5 or older to begin annual withdrawals from their tax-sheltered retirement accounts and pay taxes on those distributions.

It’s the unofficial kick-off of what economists have been calling the Great Wealth Transfer, and it will unfold over the next 30 years with younger members of Generation X and — crucially – the millennial generation inheriting roughly $30 trillion in assets from their aging parents and grandparents. This massive migration of assets will have a dramatic impact in virtually every industry.

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Most commentators who have been following this issue have tackled it from the perspective of the wealth management industry, attempting to project how different generational cohorts will invest this vast sum. But there’s much more to this phenomenon than investing alone.

Tax, for one, will be impacted significantly, and depending upon how the current debate surrounding the estate tax is resolved, there could be several wildly different scenarios playing out as inheritances change hands. The other major factor is consumer spending. Flush with $30 trillion in newfound cash, gen Xers and millennials are certain to change current patterns in spending on home ownership, autos, and other big ticket-items that could drive a shift in the U.S. economy. That could affect the fortunes of many different kinds of companies.

Weighing the Tax Implications

First, let’s look at the tax issue surrounding the Great Wealth Transfer. Under current U.S. tax law, any inheritance under $5.49 million (double that for a married couple) can be passed to beneficiaries without incurring a federal estate tax. Any amount in excess of that threshold would be taxed at 40%.

Brian Peccarelli

Brian Peccarelli BrianPThomson, wealth transfer

So, for example, if a single parent passed along an inheritance of $5.6 million to his heirs, approximately $100,000 of it would be taxable and the total estate tax due would be $40,000. With the threshold set this high, the federal estate tax will affect very few families. Moreover, the Trump administration has suggested it plans to eliminate the federal estate tax as part of its sweeping tax reform plan, essentially rendering the federal estate tax a moot point for most.

However, 20 different states and the District of Columbia currently impose their own state-level estate taxes that could have a more significant impact. Massachusetts, for example, imposes a 16% tax on any inherited assets over $1 million and Washington State has a 20% tax on estates larger than $2.1 million.

While these state-level taxes rarely register on the radar of macroeconomists, the fact remains that $30 trillion worth of inherited assets is going to have a disproportionate impact on the 20 states that do currently have estate taxes on their books versus those that do not. That impact can cut both ways. As the progressive-leaning think tank, the Center on Budget and Policy Priorities points out, states currently collect somewhere in the neighborhood of $4.5 billion per year on their estate taxes. But, as the conservative-leaning think tank The Heritage Foundation argues, that tax burden can cause wealthy older people to move to another state to avoid the tax, ultimately having a negative impact on a state’s economy.

Regardless of which view you subscribe to, the fact remains that a notable surge in inherited assets will introduce a number of socioeconomic variables into state economies, ultimately impacting everything from infrastructure spending to retail sales to health care on a regional basis.

Impacts on Consumer Spending

The other major factor the Great Wealth Transfer will influence heavily is consumer spending. You see, the boomers aren’t the only ones hitting an important age milestone right now.  Last year, the first millennials turned 35 years old and entered the peak spending years for all categories of goods and services.

According to Morgan Stanley research, the biggest single category impacted by these peak spending years is housing, with aggregate spending among millennials expected to increase 25% as college loans are swapped for home loans.

That’s going to make understanding millennials — that notoriously hard-to-quantify generation — the major challenge ahead for businesses of every type. For example, it should come as little surprise that millennials have already become the largest source of new mortgage originations for the last three years. However, they are still much less likely than members of generation X to own a home, use credit cards, or get married.

These differences, combined with the tremendous buying power that is coming to this generation, will have knock-on effects across every industry, affecting the way products are bought and sold and having a profound impact on the kinds of products and services that resonate with end-user consumers. Understanding those impacts and positioning to capitalize on them will be an imperative for businesses large and small.

That companies must navigate these uncharted waters amidst a swirl of uncertainty in Washington only adds to the complexity of the challenge. The payoff for those who get the formula right, however, will be staggering.

Brian Peccarelli is president of the tax & accounting business of Thomson Reuters.