For Passing Wealth Between Generations, Property Is Still King
It’s no secret that baby boomers continue to hold an outsize proportion of wealth in the U.S., and in 2021, Americans ages 70 and up had a collective net worth of close to US$35 trillion, per Federal Reserve data. (Baby boomers are roughly classified as those between ages 58 and 76, while Generation Xers fall between ages 42 to 57; millennials ages 26 to 41; and Generation Z ages 10 to 25, according to Beresford Research.)
As the process of passing these assets down to younger generations gains momentum, some economists and financial reporters have begun referring to this point in time as the greatest wealth transfer in modern history. Real estate is one of the most efficient and secure ways for high-net-worth individuals to pass on their significant generational wealth.
“For wealthy families, transferring wealth, such as property, to the rising generation during the parents’ lifetime may be beneficial in reducing future estate taxes,” says Shilpa Mirchandani, lead wealth planning strategist at Wells Fargo Wealth & Investment Management. “Along with the gift, any future appreciation and income generated by the property is also removed from the taxable estate.”
“A gift made during life may utilize the parent-transferor’s gift tax exemption (currently at US$12.06 million per individual or US$24.12 million for a married couple in 2022) and any gifts above the gift tax exemption amount may be subject to a gift tax,” Mirchandani adds. “We recommend that our clients be intentional and thoughtful with their gifting strategies as it’s important to consider ways to optimally utilize your gift tax exemption based on the family’s values and legacy goals.”
For families currently considering this strategy, the issue may be time sensitive, as well. “Note that the current lifetime gift tax exemption is scheduled to sunset in 2026 and essentially be cut in half, under the Tax Cuts & Jobs Act of 2017,” Mirchandani says.
Trusts are a popular and potentially advantageous avenue for making this type of transfer. In Palm Beach, younger buyers often use trusts to buy their homes, says John Cregan, senior global real estate advisor, Sotheby’s International Realty - Palm Beach Brokerage. Cregan says he’s seen more second-generation buyers buy their own homes in the popular vacation spot rather than stay with mom and dad when they visit. “It’s for privacy and for investment,” he says. These younger buyers are purchasing for diversification, something family offices have recommended in the past few years, he adds. “There’s so much wealth at the high-end of the market. And price appreciation down here has led to a major increase in wealth, too."
“Parents can utilize a limited liability company structure along with irrevocable trusts to make gifts to children,” Mirchandani says. “Doing so may allow for the use of valuation discounts that optimize the usage of the gift tax exemption. Further, assets held in an irrevocable trust are generally not subject to creditors’ claims or divorce proceedings.”
This model can serve an educational function, as well. “An adult child may serve as a co-trustee of the trust, allowing for a forum to educate and prepare the child on trust and investment concepts, which can often be complex,” Mirchandani notes.
In Ireland, “We see that property is deemed as a valuable place in which to store family wealth,” says David Byrne, managing director, Lisney Sotheby’s International Realty. “I would say it’s the top way in which high-net-worth individuals will try to assist their adult children. In some respects, it is a very significant component of the upper end of the residential market in Ireland,” Byrne adds.
Elsewhere around the globe, Portugal has become a popular option for parents looking to purchase for their children. “Portugal doesn’t impose wealth, inheritance, or estate taxes. Even the property tax bill in Portugal is a fraction of what Americans pay in the U.S.,” says Miguel Poisson, CEO, Portugal Sotheby’s International Realty.
In addition to potential tax benefits, so-called golden visa programs also remain a popular option for international luxury buyers looking to keep their family’s options open amid geopolitical turmoil.
“The Maltese passport is one of the strongest in the world, and we have one of the most reputable [visa programs] in the world,” says Richard Bellerby, senior sales associate, Malta Sotheby’s International Realty.
Home Buyers and Sellers by Generation
Millennials made up the largest share of home buyers, while Baby Boomers made up the largest share of home sellers, according to the National Association of Realtors’ 2022 Profile of Home Buyers and Sellers. It’s now more likely for an older Millennial to be a first-time seller than a first-time buyer, according to NAR.
Millennials made up the largest share of home buyers, and 26% of home sellers
Baby Boomers made up the largest share of home sellers, but only 29% of buyers
Gen Z made up only a small portion of home buyers and sellers, representing just 2% of each
Source: The 2022 NAR Profile of Home Buyers and Sellers
“The minimum spend for the property purchase for citizenship is around US$750,000, but our average buyer who’s participating in these programs will spend triple that,” Bellerby says. “In September we hit 120% of our sales goal for the entire year, and increased what we sold last year by 208%. We have a lot of American clients who are used to a yearly property tax, but we don’t have that here.”
“With every single one of these high-end clients buying in Malta, the family’s involved,” Bellerby adds. “For a nominal fee you can add your children to your program and then they get the passport for themselves. We just closed on a EUR€7 million property because the buyer’s four-year-old daughter liked it, and he wants a nice place in case she wants to live here.”
Regardless of whether their purchases are done individually or through some form of wealth transfer, younger owners are unquestionably making their mark in the real estate market.
In the past year, millennials have gone from representing 37% of U.S. buyers to 43%, making them the largest generation of buyers currently in the market, according to the National Association of Realtors’ 2022 Home Buyer and Seller Generational Trends report.
Among younger Gen Z Americans, 30% surveyed cited affordable homeownership as the most important factor in determining where they might want to live in the future, according to a recent Commercial Cafe analysis reported by The New York Times. Other crucial determining factors included the percentage of other Gen Z residents; unemployment; internet speed; recreation options; green commuting options; and parks and schooling options. All told, Atlanta, Georgia, and Minneapolis, Minnesota, recently topped the survey’s list of cities for buyers in this age range.
Indeed, the growing buying power of younger generations may spell good news for secondary cities as well as the suburbs. Between 2020 and 2030, the number of Americans in “family formation years” between ages 30 and 49 is projected to grow by 8.4 million, according to the National Association of Realtors, and buyers ages 35 to 40 have already shown a marked preference for locations that offer enough space to accommodate work and school while maintaining access to local amenities.
Top U.S. Cities for Gen Z
Commercial Cafe, a real estate listing service owned by data firm Yardi Matrix, scored 45 U.S. cities on characteristics important to 18-to 25-year-olds, including affordability, unemployment rate, internet speed, recreational and dining establishments, green commuting options, green spaces, and more.
- Atlanta, GA
- Minneapolis, MN
- Boston, MA
- Tucson, AZ
- Raleigh, NC
- Columbus, OH
- Seattle, WA
- Austin, TX
- El Paso, TX
- New York, NY
Commercial Cafe August 22 Study. Data sources: Census Bureau, BroadbandNow, C2ER, Tpl.org, BLS
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The Sotheby's International Realty 2023 Luxury Outlook Report is an ambitious exploration into high-end residential markets across the globe and identifies trends that are likely to shape the coming months in luxury real estate.
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