Head of Defined Contribution and Wealth Advisor Services Matt Sommer co-authored a study examining the association between changes in wealth during the Great Recession and changes in bequest expectations. Financial professionals can use the findings to better understand shifts in bequest expectations during various economic cycles so they can provide guidance to help clients meet their long-term wealth transfer goals.

While the Great Recession and its subsequent recovery has been studied extensively, little is known about the association between changes in wealth during these periods and changes in bequest expectations. It is a connection worth examining, especially considering the fact that wealth transfer has risen to the forefront of many investors’ minds as a result of the COVID pandemic.

To gain a better understanding of how negative economic shocks can impact an investor’s estate planning objectives, I collaborated with a colleague from Kansas State University’s personal financial planning department, HanNa Lim, Ph.D., CFP®, to conduct a study titled: “A Lasting Legacy of the Great Recession: How Changes in Wealth Were Associated with Changes in Bequest Expectations.”

Following are some of the key findings:

• Respondent average net worth decreased by $33,620 from 2007 to 2009, while the average expected minimum bequest declined by $12,282.
• Respondent average net worth increased by approximately $130,000 between 2010 and 2016, but respondents’ average bequest expectations did not rise during this recovery period.
• In fact, individuals who experienced an increase in net worth of between $13,000 and $51,000 were likely to lower, rather than raise, their bequest expectations.
• Only those respondents with the largest post-recession wealth gains – those who experienced a net worth increase greater than $389,000 – reverted to their pre-recession bequest expectations.

Clients’ reluctance to revise their bequest expectations upward when their net worth rebounds following a crisis is a new element of wealth transfer planning that has not been previously examined. The asymmetrical nature of this relationship was a key finding of the study and may have significant implications for financial planners.

Downturns Are a Chance to Revisit Clients’ Goals

First, financial professionals should use a negative economic shock as an opportunity to review their clients’ previously stated objectives. In some cases, clients may be overreacting to their environment rather than carefully considering whether they are still on track to meet their goals. It is possible that short-term wealth fluctuations will not materially impact a client’s original wealth transfer intentions. Additional education and what-if scenario planning may be helpful to reassure clients that they are still on course and reinforce the importance of taking a long-term perspective.

Understanding Client Priorities

Alternatively, making a bequest may not be a top priority for some clients, especially if there are concerns that a recent and significant decline in wealth may impact a client’s future standard of living. In these cases, financial professionals and clients are likely to agree to prioritize cash flow generation at the expense of leaving a sizable bequest to children.

Similarly, the study suggests that individuals may not necessarily associate wealth gains with larger bequests. Instead, they may want to use their good fortune to increase consumption or allocate a larger share of their wealth to charitable gifting. Having frank, non-judgmental conversations with clients about their priorities can be helpful in understanding the potential impact a change in wealth may have on their bequest expectations.

Implications in the Current Environment

While this research studied the period during and immediately after the Great Recession, it has relevance today as clients may need assistance recovering from the negative shock associated with the still-ongoing COVID-19 pandemic. The pandemic has caused many Americans to consider contingency plans in the event either spouse becomes ill. As a result, demand for estate planning attorneys has surged across various demographic groups. For example, many young families with children are thinking about choosing potential guardians for their children. Business owners and corporate executives may be concerned about succession planning and the nuances of transferring illiquid wealth.

Financial professionals are encouraged to leverage the public’s newfound interest in estate planning to reengage their clients. In some cases, previously reluctant clients may now be more willing to proceed, while in other cases, a review of existing wealth transfer arrangements may be warranted.

Considering Other Dynamics to Complete the Picture

A final area of consideration is the influence of intra-family relationships on bequest intentions. In a previous post, I shared the findings from another study I recently helped conduct that explored whether individuals who have a strained relationship with their children are more likely to leave them out of a will or trust. While this factor is not necessarily tied to the relationship between changes in wealth and changes in bequest expectations, wealth transfer goals are likely to reflect, at least in part, the relationship dynamics between parents and children.

The study’s findings also serve as a helpful reminder that the financial trauma of negative economic shocks such as the Great Recession or the COVID pandemic may linger for many years, even if clients fully recover their losses. Financial professionals can play an important role in helping clients who harbor these strong emotional reactions – but only if they are able to fully grasp the various dynamics involved in a client’s relationship with money.

Again, this is why only a full review of a client’s priorities, attitudes and unique situation is so critical to understanding how changes in wealth may impact bequest expectations. Ultimately, this understanding can enable financial professionals to provide the necessary interventions so they can help clients meet their long-term wealth transfer goals.