Wealth Transfer Brings Hidden Risks Advisors Must Address
A whopping $124 trillion is set to change hands by 2048 as baby boomers pass their wealth to younger generations, with the vast majority of that going directly to their heirs. It’s been called the largest wealth transfer in history, and while many inheritors and financial advisors focus on the tax, estate planning and investment strategy implications, another very real––and routinely overlooked––piece of the puzzle is the transfer of risk.
Wealth inheritance can change someone’s entire risk profile in ways they don’t always fully understand until something goes wrong.
Here’s a real-life example. A family recently came into new wealth and inherited $2.5 million worth of jewelry. They brought in a professional to have everything properly appraised and scheduled on their insurance policy, as advisors recommended. Soon after, when the family was away posting pictures online from a vacation abroad, their home was robbed, and every piece of jewelry was taken. They had appropriately scheduled their jewelry, but as a newly wealthy family, no one had considered the risk that comes with sharing real-time details about their whereabouts online.
This is the piece of the wealth transfer conversation that consistently gets missed. To help clients protect what they’ve inherited, financial advisors must understand how newfound wealth changes a person’s risk profile and which risks tend to slip through the cracks.
The Complexity Is Threefold
When a client’s wealth suddenly grows, understanding their new risk profile comes down to three key questions. Getting clear on all three makes it easier to protect what’s most important to them.
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How much is lifestyle changing? For some people, an inheritance can completely change their day-to-day reality: more assets to manage, more frequent travel to far-flung destinations, and access to places and experiences that weren’t part of their lives before. All of this can significantly raise the level of risk an individual or family carries.
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What are the risks tied to the specific assets inherited? Every inherited asset comes with its own set of exposures. A coastal property in Malibu, for instance, carries flood and wildfire risks that a client may never have needed to consider before. Similarly, a luxury car collection introduces liability risks that standard auto policies usually aren’t designed to address.
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What’s the risk tolerance? Someone who inherits wealth may have a totally different risk tolerance than the person they inherited it from. Children who are passive recipients of wealth, for instance, may be more willing to self-insure or retain more risk than their parents did. These are conversations advisors should have directly with their clients to understand personal wants, needs and comfort level surrounding risk.
What Are the Commonly Overlooked Risks?
There are countless risks associated with inherited wealth, but a few recur. With the right mitigation measures and insurance protection, each of these can be materially reduced.
Digital exposure. Like the illustration of the European holiday, social media has made it easier than ever to unintentionally broadcast wealth and whereabouts. Apart from oversharing, newly wealthy families also face heightened exposure to cryptocurrency scams, phishing attempts and even AI-generated deepfakes that can exploit their name or likeness.
Auto liability. Auto liability has become a bigger concern in recent years, largely due to the rise in nuclear verdicts, or jury awards exceeding $10 million. Say a client who recently came into wealth buys a high-performance sports car, a friend takes it for a spin, and that friend ends up in a serious accident. The client could face significant liability, especially if they didn’t have the right casualty or umbrella coverage in place.
Personal staff. Hiring household staff––a nanny, a housekeeper, or driver––creates liability that many individuals who come into new wealth overlook. If a staff member slips on a patch of black ice walking outside to get the mail, your client can be held responsible.
Help Clients Protect What They’ve Inherited
These best practices can help ensure clients don’t lose their newfound wealth to something preventable:
Know your client’s priorities. Talk to your clients about their assets and comfort level with risk from the outset. Before their wealth transfer is complete. This makes conversations much more productive once risk advisors are brought in. With everyone on the same page, risk advisors can tailor mitigation and insurance recommendations that fit the client’s situation.
Take inventory of the assets and understand their plan. This is especially important when wealth is being distributed to multiple children or family members. Is one sibling planning to buy out the others’ stake in a property? Will an estate be jointly owned? Without a clear plan, families can find themselves disagreeing over basic decisions, such as whether to file a claim when a shared asset is at risk. Help clients take stock of what they’ve inherited and clarify the plan for each asset to avoid confusion down the line.
Bring in a risk advisor early. Anyone inheriting significant wealth benefits from education and induction into the complexity of their new situation. The earlier a risk advisor can start that process, whether by educating the next generation about social media habits or by walking through the basics of protecting new assets, the better. Starting early helps ensure clients grow up with, or quickly build, good habits and awareness.
Treat insurance planning with the same rigor as trust and estate documents. Apply the same level of attention that goes toward wills, trusts and estate strategy to insurance. It’s rare for risk advisors to review a new affluent client’s coverage and not find gaps–which is why it’s critical to conduct regular policy reviews, stress-test coverage against real-life scenarios and work with an advisor who understands complex, high-net-worth situations.
Preservation Is the North Star
The Great Wealth Transfer is so often approached as a story of accumulation: what assets are being acquired and how to invest them strategically. But preserving those assets is just as important, and accounting for the risks that come with them is paramount. Financial advisors who bring risk and insurance into the conversation early can give their clients a stronger foundation as they step into a new level of wealth and help them avoid preventable loss.
