From the January 2009 issue of Investment Advisor • Subscribe!

January 1, 2009

Passing It Along

Wealth transfers continue despite decline in portfolio values

Despite the market maelstrom that has slashed the value of portfolios left and right, there is still plenty of wealth that is on the brink of being transferred from one generation to another.

According to a recent Cerulli Associates Report, Wealth Transfer: Sizing, Trends, and Opportunities, $38.2 trillion will be passed from the so-called Silent Generation and first-wave baby boomers to heirs and charity between 2011 and 2035. Bequests to heirs are by far the most common, representing 87% of the wealth to be transferred during this time, according to the report. This sizable asset base presents a substantial opportunity for advisors. "The demographic trends that drove the financial industry to develop and distribute retirement income solutions will also lead to the necessity for products and services that address wealth transfer," notes Lisa Plotnick, associate director and co-author of this report.

The report counsels that as a natural extension of the retirement income process, manufacturers and advisors need to consider the products their clients will most likely be holding during retirement, and the implications those products present for effective wealth transfer. "In a perfect world, planning for both retirement income and wealth transfer would be done in tandem," says Plotnick.

The most popular products used as part of wealth transfer planning are universal life insurance, variable universal life insurance, and long-term care insurance. Nearly 24% of advisors surveyed by Cerulli in 2008 reported frequent use of universal life insurance, and 20% reported frequent use of variable universal life insurance for this purpose. The report also explains that "spendthrift protection," which Cerulli defines as ways for grantors (especially parents) to ensure their heirs don't misspend their inheritances, is becoming more popular. "Retirement income itself is a continuous cycle. I believe we will see a much greater use of annuities both inside and outside of trusts, so that parents can provide an eventual retirement income supplement to their kids," Plotnick says. "This is bringing retirement income planning full-circle; linking it with wealth transfer and wealth preservation," she adds.

While the life insurance industry is most closely aligned with the wealth transfer issue, it is finding it difficult to generate new sales. "Advisors are reluctant to sell something they don't understand. Training programs should help with this issue, and insurance firms are urged to lead the way," explains Jing Sun, analyst and co-author of this report.

As the oldest baby boomers entered the 55 to 64 age group in 2004, the households aged 55 and above reached 36% of the total U.S. population and controlled 59% of the total net worth, according to the report.

Reprints Discuss this story
This is where the comments go.