The Illusion of The Great Wealth Transfer
Source: Swastik Arora
The subtleties of American wealth transfer inequalities mean the projected exchange of trillions in wealth generationally will be less grandiose and inclusive than marketed
What would you do if you were handed a check for $1 million and keys to a home? Would you immediately know what to do with it? How do you manage such an inheritance?
There is a good chance someone in the United States will face this scenario in the coming years. A family member will pass away, and they will be left to manage an inheritance from the wealthiest generation in U.S. history: Baby Boomers (those born between 1946 and 1964).
Money Moves
Roughly $1.5 to $ 2 trillion (recent estimates) of wealth changes hands through inheritances and large gifts every year in the U.S. This exchange through wills, trusts, and direct gifts includes all asset types: cash and its equivalents; fixed-income assets like T-Bonds; your typical equities; derivatives; alternatives like real estate and commodities; and now emerging digital alternatives like cryptocurrencies. While this may seem like an immense amount of money, $1.5-2 trillion is on par with the historic benchmark of wealth transfer, a statistic that has hovered around 1% of total wealth in the U.S.
However, projections show that this number will likely be much higher in the coming years. Cerulli Associates—a research, analytics, and consulting company specializing in the wealth management industry—anticipates that $124 trillion of wealth will transfer hands through 2048, amounting to roughly $5 trillion per year over the next 23 years. This stark increase in yearly transfer of wealth is now a phenomenon dubbed The Great Wealth Transfer.
The Great Wealth Transfer is a unique moment in the history of wealth in the United States. Nearly $105 trillion will be transferred generationally, with 81% of it coming from Baby Boomers to younger generations. Millennials are set to inherit the most over the course of 25 years; however, Gen X will receive the greatest portion of assets in the next 10 years—$14 trillion versus Millennials' $8 trillion.
And in many ways that will impact the economy and society, countries are already seeing the impacts. According to The Economist, inheritances as a percentage of GDP have increased by 50% over the past 20 years, reversing a trend and marking the beginning of a new era of wealth transfer.
Supposedly, the age of inheritance is back.
Right Place, Right Time
The immense wealth controlled by the Baby Boomers originated during the post-World War II recovery. At that time, home prices were more affordable, wages had stronger purchasing power, employment was high, and the stock market was roughly 280x less than it is today.
Massive increases in productivity through the emergence of different technologies meant money invested early from the stable wages would have years to compound. According to the Survey of Consumer Finances from the Federal Reserve, the sharpest increase was from 1983 to 2022—a period which corresponds with growth driven by major technological breakthroughs from IBM’s Personal Computer released in 1981 and the dotcom boom to Apple’s release of the iPhone in 2007, current social platforms, and AI growth.
Baby Boomers were born in a strong economic windstorm with heavy tailwinds to lead to wealth accumulation, so understandably, they control 50% of U.S. household wealth. And now, this money is getting passed down.
Wealth Disparities
Source: Urban Institute
It would be a misnomer to say this great transfer is for all Americans. Data shows that over 50% of the expected transfers ($62 trillion) are expected to come from families that are high-net-worth or ultra-high-net-worth (HNW/UHNW), a group of just 2% of the U.S. population.
According to UBS, a bank, 53 people became billionaires by inheriting money, versus the 84 who made their fortune by working, a disparity that reflects this truth of wealth transfer: inequality is central to the discussion around how money moves generation to generation.
To the average American, hopes for immense generational wealth from an inheritance are much lower. According to Federal Reserve Data, the average inheritance for an American is $46,200. This number also hides broader structural inequalities in the United States.
When comparing White and Black median net worth (total assets minus liabilities), a clear racial divide appears. The median Black family’s net worth was $24,100 compared to $189,100 for the median White family.
According to an Urban Institute report that analyzed intergenerational wealth transfer inequality between White and Black families, a few reasons emerge. The disparity between debt owed relative to assets held is an indicator of inequality. Comparing the debt relative to assets is critical to normalize the data because White and Black families both demonstrate a desire to borrow at similar levels, and the median White family owes more debt.
Furthermore, the type of assets held and the amount differ. The Urban Institute reported that Black families are more likely to be excluded from financial activities, and when they do participate, they invest in disproportionately safer, but lower-returning, assets like universal life insurance. In contrast, White families are more likely to invest in riskier assets like stocks, which typically yield higher returns.
Real estate is another key metric in the discussion. Black families are less likely to own their homes relative to White families. In a advertised wealth phenomenon in which much of the value comes from the substantial rise in real estate assets, racial wealth disparity is further exacerbated. The study concludes that the inheritance of all these accumulated assets accounts for more of the racial wealth divide than any other behavioral, demographic, or socioeconomic indicator.
The Winners
On the other hand, a few clear winners will emerge from this transfer (excluding the obvious HNW and UHNW families who preserve their wealth).
In the wealth management business, scale is everything—firms that capture the most of these new clients and grow their Assets Under Management (AUM) the most will be the ones that thrive.
Financial advisors across Western countries are trying to get a jump start on capturing this market. Fidelity users see a recurring message to name beneficiaries if no one is named, and wealth managers encourage current clients to name heirs to all of their assets.
The second component of capturing younger generations is connecting to them now, before any inheritance or will discussion occurs at all. One demographic group that is especially targeted is women, the second beneficiaries of this wealth transfer, and the group closely tied to the success of wealth manager market expansion in the future.
A report from consulting giant McKinsey & Company clearly encapsulates this sentiment in its title: “The new face of wealth: The rise of the female investor.” For years, there has been a steady increase in female-controlled assets, and now, more women are in positions to inherit money. This is clearly seen in projections: women-controlled assets in the U.S. are expected to grow from one-third of all financial assets in the EU and U.S. to 40-45% by 2030.
Four key reasons drive this increase. The social trend is an ongoing decline in marriage rates, coupled with high divorce rates, which encourages women to have greater financial control over their own assets. This is coupled with a cultural shift of increasing financial literacy for women, especially among younger women.
The economic tailwind is found in women’s average income, which continues to rise, something McKinsey attributes to the gap between women and men in educational attainment and increasing access for women to high-paying jobs.
And finally, the concentration of wealth among Baby Boomers, combined with longer life spans for women, means there is an increasing number of affluent widows.
However, an interesting data point emerges when analyzing female wealth: affluent women are less likely to work with financial advisors. This is where financial advisors and wealth management companies can adapt to capitalize on an ever-expanding market.
Potential Shortcomings
Healthcare costs are one of the core reasons that the projected economic impact of The Great Wealth Transfer may fall short of expectations. Fidelity estimates a 65-year-old couple today will need about $330,000 for medical expenses in retirement—excluding long-term care costs. These unexpected costs often erode a family’s assets late in life, meaning the Baby Boomer population (between ages 61-79) may be dipping into the funds that would otherwise be passed down to their heirs.
Real estate, a popular asset held by Baby Boomers, is also a difficult exchange that may not reap the economic benefits that are projected right now. Adapting suburban homes to modern lifestyles and the housing needs of younger generations may require additional investment and time from heirs, making a house potentially more of a hassle than a gift.
In an ironic fashion, the very healthcare technologies that drove wealth, and by extension, soaring potential inheritances, led to a massive increase in longevity and life expectancy, meaning an inheritance often arrives later than younger generations expect.
When any inheritance finally arrives, the transfer will provide younger consumers with a slightly lessened financial burden—White consumers more so than Black consumers. Women will continue to accumulate more wealth, establishing even stronger financial foundations. And wealth managers are poised to seize on The Great Wealth Transfer, especially those who effectively market to younger generations and ever-expanding demographic groups.
At the end of the day, the widespread transfer promised will likely be less inclusive than advertised. However, the economic and market impact will be significant.