Depression Babies Seek Security - Baby Boomers Move to Retirement

"Predictions are difficult, especially about the future."


With the massive changes in our financial system the past two years, baby boomers and the depression babies are asking, "What is likely to occur in the future?" While predictions are indeed difficult, by examining the past and the present it is possible to make several projections about the future. Part I of this article discussed the economy and wealth, the impending tax increases on the affluent and the probable boom in financial counseling. Part II will analyze charitable financial planning options for the depression babies group and the baby boomers.

The sections for each will include a prediction, an analysis of the factors surrounding that prediction, and an explanation of the likely impact on major and planned gift donors.

1. Goals of Depression Babies

Prediction: Depression babies will seek security. They will choose gift annuities, life estates and IRA testamentary unitrusts.

Analysis: The generation born between 1930 and 1945 is the "Great Depression" group. According to U.S. Census Bureau Data, in 2008 the depression babies numbered approximately 27 million.

In 2010, the babies born between 1930 and 1945 who experienced the Great Depression will be age 65 to age 80. Those surviving to 2020 will be age 75 to 90. During this decade there will be three attractive gifts for Great Depression babies.

First, as a result of the economic crisis in 2008, there is a very strong desire for security and lifetime income. This translates into a strong market for charitable gift annuities. A charitable gift annuity provides fixed payments, a charitable income tax deduction and partly tax-free payouts. These benefits make the gift annuity especially attractive to depression babies.

Second, many of these individuals have homes that appreciated significantly. Most families purchase their largest home at age 43. By age 65 to 80, they no longer need that large residence, but their home has appreciated significantly. As the housing market recovers during the next decade and homes continue to appreciate, many will find that their appreciation exceeds the $500,000-married or $250,000-single federal exclusion for sale of a principal residence. Others will decide that they want to continue to live in their homes for life.

The increase in home values will permit significant tax savings through the charitable deduction from a life estate. For those who wish to sell and "buy down," a combination sale and unitrust will be very attractive.

Third, following the "holiday" in required minimum distributions (RMDs) in 2009, the probability is that RMDs will apply again during the decade. With the return of the markets to health, IRAs, 401ks, 403bs and other qualified plans will be the most rapidly growing part of many estates.

During the past two centuries, the real rate of return on stocks has been determined by Dr. Jeremy Siegel of Wharton School to be 7%. After the market crash of 1932 and 1974, the stock markets returned (over a period of five to fifteen years) to the 7% trend line. If the securities markets again revert to Dr. Jeremy Siegel's 7% trend line, then qualified plans will grow from $10 trillion to perhaps $20 trillion by the end of the decade.

This growth of qualified plans will produce an extraordinarily favorable market for the "give it twice" testamentary charitable trust for a term of years that will benefit children and then charity.

New Decade Donors: With the desire for security, donors over age 75 will be very interested in gift annuities. In addition, many seniors will desire to move from their large home to a retirement community, and can use the unitrust "buy-down." Finally, as qualified plans recover, there will be great interest in testamentary unitrusts funded with IRAs and 401ks.

2. Boomer Generation Goals

Prediction: The boomer generation will create wills with hundreds of billions in bequests for charity. They will also be interested in unitrusts, especially in 2010 before the 2011 increase in capital gains rates.

Analysis: The generation born between 1945 and 1965 is the "Baby Boomer" group. According to U.S. Census Bureau Data, in 2008 the baby boomers numbered approximately 74 million.

Because the baby boomer generation is almost three times the size of the depression babies' generation, it will acquire a much larger level of total wealth. Assuming that national net worth grows to $70 to $85 trillion by the end of the decade, the baby boomers are likely to hold over $25 trillion in assets.

According to a study done for The Association of Fund Raising Professionals by Dr. Russell James of the University of Georgia, there are several factors that would motivate baby boomers to include charity in a will. These are that a person is starting to make charitable gifts, has an improvement in self-reported health and has an increase in assets.

Because the baby boomers during age 45 to 65 are reaching peak wealth and frequently increasing gifts, they are fairly likely to include an initial charitable bequest during this time of life. Assuming that the baby boomer generation does acquire over $25 trillion in assets, a bequest of 2% of that amount would be $500 billion. If their asset growth is larger or the marketing programs by charities are more successful in an effort to reach the baby boomers, that $500 billion number could easily grow to $1 trillion in bequests. While the time necessary to receive the bequests will be lengthy due to the longevity of baby boomers, it is also probable that the bequests will grow with the increasing estates and the present value of boomer bequests will hold relatively constant.

The boomer generation will also be in the bull's-eye of the "war on wealth" during this decade. Those boomers who hold appreciated land or stock will be excellent candidates for charitable remainder trusts, particularly the "sale and unitrust" combination. During the years 2014 through 2020 when asset values could very possibly increase, there may be a significant increase in funding of charitable trusts by the boomer generation.

New Decade Donors: As they become empty nesters and their estates grow, boomers between ages 45 to 65 may include a "first-time" charitable bequest in their estate plans. Those with larger income and assets will feel targets of the war on wealth and together with their CPAs and CFPs decide to save taxes through charitable trusts and outright gifts.