Baby Boomers are not getting any younger and as a result assets worth nearly $125 trillion are about to get new ownership. It’s called “The Great Wealth Transfer,” and its meaning is clear: Vast numbers of heirs, charities, and tax collectors are about to benefit in a big way.
How Much Is Out There?
According to Cerulli Associates, a Boston-based financial research firm, an estimated $124 trillion will change hands between now and 2048. In a 2024 research report, it found that “$105 trillion is expected to flow to heirs, while $18 trillion will go to charity.”
Most of the money will come from Baby Boomers – individuals born from 1946 to 1964. “Nearly $100 trillion will be transferred from Baby Boomers and older generations,” said Cerulli, “representing 81% of all transfers.”
The distributions will hardly be even. The Federal Reserve found in 2020 that the typical inheritance from a family with a parent who had earned a college degree was $92,700 versus $76,200 for families where the parents did not hold a degree. Some heirs will do far better. Cerulli points out that half the transfers – about $62 trillion – will go to just 2% of all households.
Huge amounts of money will be handed out fairly soon. Cerulli found that “Millennials will be inheriting the most of any generation over the next 25 years ($46 trillion). However, Gen X stands to inherit the greatest portion of assets in the next 10 years, totaling $14 trillion to Millennials’ $8 trillion.”
The bottom line: Time, tide, and mortality wait for no one. Baby Boomer assets will be divided among millions of households, including a small number who will receive inheritances worth millions, if not billions, of dollars.
Real Estate Distributions
Real estate is the largest asset held by many households. The place where you live can be a massive source of wealth. There are no guarantees, but there have been generally rising property values and equity since the end of World War II. Some of this equity increase has been the result of inflation, some from paying down mortgage balances over time, and some from local marketplace demand and relatively less supply.
Government figures show that the typical home sold for $73,600 at the start of 1980, a figure that rose to $502,200 in the middle of 2024. Most of that wealth – 75% — will ultimately go to sons, daughters, and other family members, according to Freddie Mac. Corrected for inflation, $73,600 in 1980 has the same buying power as $298,567 at the end of 2024.
A lot of that real estate equity is recent, and a disproportionate amount of it is held by seniors.
“As of 2024,” said Freddie Mac, “there were 65 million Baby Boomers, accounting for 20% of the U.S. population and 36% of total homeowner households. Total household net worth has increased by approximately $44 trillion, or $332,000 per household, since the pandemic (Q4 2019 to Q2 2024). Of that, Boomer overall wealth increased by $19 trillion, or $486,000 per household, half of which is due to house price appreciation.”
But while there’s unquestionably a lot of real estate to be inherited, the process is sometimes murky and complicated. Here are some of the issues to consider.
Where There’s A Will, There’s A Way
Why don’t people plan for the inevitable future? To start, death is not a happy topic. Major assets can often be passed on without a will (think of a bank account where the balance is payable upon death to one or more beneficiaries). And then there is the oft-messy nature of family relationships, relationships that can be made even worse when it comes time to divvy up an estate.
However, most people simply lack wills and related paperwork. According to LegalZoom, “56% of Americans believe that estate planning is important, but only 33% of adults in the U.S. have documented their end-of-life plans. Of the estate plans made in 2021, 75.12% were wills, 18.78% were trusts, and 6.1% of people nominated a guardian for their young children.”
TrustandWill.com points out that the probate process typically takes 20 months to complete and involves real costs: “Probate on average ranges between 3-7% of the total value of the estate.”
While it may be tempting to die without a will, and while wills and related paperwork cost money to prepare, dying “intestate” is something to avoid. Without a will, state rules govern who gets what from your estate. Beneficiaries you prefer may get less or even nothing unless there is a will in place, and distributions can be delayed for months or years without estate planning.
Is There A Mortgage?
Seniors own well over 38 million homes. The Census Bureau estimated in 2023 that those aged 60 and above have 22.5 million debt-free homes and another 15.8 million houses with mortgage financing.
The transfer process is fairly easy when estate homes are owned without mortgage financing. A local attorney can prepare a new deed and arrange for related services. Insurance coverage will have to be updated to show new ownership.
However, things can get complex when there is a mortgage. The mortgage is a debt secured by the property and current ownership. If the property is sold, the loan cannot be assumed in most cases without the lender’s approval. However, there can be exceptions when wills and trusts are involved. Under the Garn-St Germain Depository Institutions Act of 1982, heirs such as spouses and children can generally assume existing loans in an estate situation. This can be very attractive, particularly when the existing mortgage has a low rate.
Property owners and their attorneys must work with lenders when creating a trust. Heirs must also work with lenders to take over existing mortgages. The catch is that some lenders are not especially cooperative.
“Homeowners,” according to the Consumer Finance Protection Bureau (CFPB), “report being incorrectly told that they must refinance the loan at today’s higher interest rates, rather than being offered options for managing the existing mortgage.”
“Many homeowners,” it added, “report waiting months or even years for servicers to process their requests, with some reporting that servicers repeatedly request the same documentation or fail altogether to respond to inquiries.”
Federal Taxes
Federal estate taxes are largely a non-issue, especially for those with wills and advanced planning. The overwhelming majority of estates pay nothing to Uncle Sam. In 2022, for example, 3,279,857 people died in the US and just 8,130 federal estate tax returns were filed.
Current estate tax standards were established in 2017 under the Tax Cuts and Jobs Act (TCJA). According to the IRS, basic exclusion amounts for individual estates increased from $5,490,000 in 2017 to $11,180,000 in 2018. With inflation, the exclusion basis has grown to $13,990,000 this year.
However, tax policies may change, and such changes may well impact estate economics. That’s because the 2017 exemptions are scheduled to end this year.
“This exemption has helped affluent families pass along substantial gifts tax-free,” explains Merrill Lynch. “But the time for taking advantage of this benefit may be drawing short — it remains in effect only through the end of 2025. After that, the amounts are scheduled to return to 2017 levels in 2026. Adjusted for inflation, the single taxpayer limit would drop back to an estimated $7 million.”
There is, however, another possibility. The tax treatment of estates and heirs could be revamped because of the need to fund the federal government.
Consider that in fiscal 2024 (the period from October 1, 2023 to September 30, 2024), the federal government spent $6.75 trillion but took in “only” $4.92 trillion in tax revenues. This means there was a $1.83 trillion deficit. As of late January, the accumulated federal debt amounted to $36.2 trillion.
The sheer size of Baby Boomer holdings — that $100 trillion — could greatly impact the debt problem if estates were taxed more vigorously.
“The federal estate tax, paid by the estates of those who have died, could be converted to an inheritance tax, paid by those receiving proceeds from estates,” according to the Brookings Institute.
It adds that the “taxation of wealth transfers will likely rise in importance over the next several decades, as the US comes to grips with both the largest set of intergenerational wealth transfers in its history and looming large federal deficits.”
Could higher estate taxes pass in Washington? That’s unknown, but a growing debt could set off a search for new revenues, a search that might include a fresh look at large estates.
If this seems implausible, consider that college endowments used for scholarships and other educational purposes have traditionally been off-limits to federal tax collectors. That changed in 2017 when earnings from larger endowments became taxable under federal rules. “In 2022,” explains the Tax Policy Center, “the tax raised $244 million from 58 institutions.”
Once the door is open to a small, modest tax, you can guess what happens next. H.R.446, if passed, will raise the excise tax on private college and university investment income from 1.4% to 21%.
“My bill,” said Rep. Troy E. Nehls (R-TX), “would put elite universities with massive endowments on notice by holding them to the same tax standard as corporations.”
The same logic, of course, might be used to justify increased estate taxes in cases involving millions and billions of dollars.
With federal tax policies possibly in flux – and a stew of convoluted and complex state and federal rules already in place – this is an especially good time to prepare wills, trusts, and related paperwork. Acting now can ensure that assets are distributed as you prefer and with as little cost, complication, or delay as possible.
State Taxes
Heirs want to make sure they pay all required state and local taxes and fees if they receive real estate. There can be taxes paid by the estate, as well as taxes paid by the heirs, but most states have neither. According to the Tax Foundation, “In addition to the federal estate tax, with a top rate of 40 percent, 12 states and the District of Columbia impose additional estate taxes, while six states levy inheritance taxes. Maryland is the only state that imposes both an estate and an inheritance tax.”
Estate taxes at the state level are generally not an issue. That’s because even when there are such taxes, there can be exemptions when there is a transfer to certain beneficiaries, such as a spouse, child, grandchild, or charity. There can also be large dollar exemptions in the states where estates are taxed. Still, estates need to check with tax professionals to see if there are any reporting requirements.