Over the coming 25 years, Baby Boomers are expected to transfer roughly $55 trillion worth of assets to the next generation, charitable organizations and Uncle Sam. Looking out four decades to 2060, some 45 million Baby Boomers will have transferred ownership of nearly $70 trillion in assets. At their peak, Boomers will be transferring 10 percent of all of the wealth in the United States each and every year.
This “Great Wealth Transfer” and the attendant change in control, will bring opportunity and challenges to countless businesses in the financial service and asset management space, as well as the families they serve.
While the majority of Boomers’ assets are held within retirement accounts, direct ownership of commercial real estate, real estate partnership interests and tenant-in-common interests account for a significant portion of those assets that will pass into new hands. When compared to a traditional portfolio of stocks and bonds, direct real estate ownership presents a host of unique challenges for families planning to transfer ownership to the next generation; the required management expertise and responsibility, indivisibility and estate planning inefficiency, lack of liquidity, on-going capital requirements, and loan guarantees to name a few.
Most important for anyone intending to transfer real estate assets as part of their estate is to start planning early and start with an open dialogue amongst all family members. (These rules apply to everyone, regardless of the size of one’s portfolio.) Passing on real assets brings in a host of family dynamics that make an already complex task that much more difficult – discussing openly and honestly with those impacted is the first step to ensuring as smooth a transition as possible. Understanding the next generation’s interests, motivations, and talents also helps to ensure the value of one’s estate is not diminished during or after a transfer. Far too many owners avoid these early planning conversations, unknowingly setting up future generations for years of animosity, strife, and often outright hostility.
For even the most seasoned commercial real estate professionals, a client’s generational planning can be a difficult subject. Tax law; gifting rules; transfer rights; partnership accounting; 721s and 1031s; tenant-in-common and Delaware Statutory Trusts; living, revocable, and non-revocable trusts are just a few of the guidelines and tools that can come into play; areas of business that fall outside most real estate service professional’s circle of expertise.
That said, the Great Wealth Transfer will create opportunities for those in the commercial real estate services industry willing to prepare. Those people and organizations willing to build a high-level understanding of the tools available to their clients, those willing to spend the time to build a network of trusted advisors, and those willing to truly listen to their clients’ needs will be better positioned to serve their clients and better positioned for success.
Source (first paragraph statistics): Baby boomers to hand down $68T in Great Wealth Transfer, www.foxbusiness.com.
Laura Hanneman is Investor Services Manager with SR Realty Trust.
