Boomers who want to transfer wealth to their adult kids should make sure their finances can pass a stress test

• Some baby boomers are gifting wealth early to help their children buy homes and build families.
• Financial planners said boomers need to ensure their own personal financial stability first.

Baby boomers are expected to pass down trillions of dollars of assets in the coming decades, but not all of them want to wait until after they die to do it.

So, how do you know if you're in a position to be able to start passing down your wealth?

Several boomers previously told Business Insider that they've been gifting cash to their adult kids well before they expect to die, as they believe the money is most useful now when they are building families and buying homes.

Financial planners say it can be a good idea to pass down wealth early if — and only if — you are in a financial position to be able to do it and still ensure your needs are met.

"I love parents that have these big hearts for their children, but they also have to be smart in making decisions for the children," Michelle Griffith, a senior wealth advisor at Citi Personal Wealth Management, told BI.

Griffith said there are several reasons someone may want to transfer their wealth early. For the very wealthy, that may be to avoid a large estate tax. But even average baby boomers, who have a net worth of around $1 million, are getting in on early wealth transfers.

"They want to share, and they want to witness wealth transfer while they're alive and healthy," she said, adding that the main reason her clients want to share their wealth with their kids is "just because it makes them happy."

Griffith said financial planning is especially important for parents who are thinking about sharing their wealth. In part, that's because many parents have a hard time saying "no" if their child needs help, so it's best to work gifting into your financial plan from the start.

Do your finances pass a 'stress test'?

Griffith said the first thing someone should do before transferring wealth is to look at their retirement resources and do something she calls a "stress test."

"A stress test is taking a look at the portfolio and modeling it in volatile markets, looking at the impact and actually the end results of their normal distribution to meet their needs," she said. "Then adding in what I consider to be a goal distribution, something that is not paramount to living, but something that they really, really want to do."

That includes considering what the portfolio might look like when the markets are most volatile and declining.

"If the portfolio can survive that and you still see that there are positive results at end of life, well now we can start to model in some type of a reasonable schedule to share some of the wealth," she said.

With this strategy, Griffith said a parent can back into the number that they feel they are able to give to their kids. Although a parent might want to do the full tax-free gift amount ($18,000 for one person in 2024, $36,000 for a couple), that might not be the right amount based on the resources they have when accounting for potential downturns.

"Stress testing the portfolio is a way for them to make an informed decision," she said, "not just with the heart, but also using the head so that they're also smart with it."

Griffith said a wealth advisor can help complete a stress test using specific software that looks at various simulations of what could happen to a person's finances. For baby boomers who have a relationship with Citi and are in the average net worth range for their generation, around $970,000 to $1.2 million in 2019, she said financial planning is provided without extra cost.

One thing Griffith emphasized that is key for people to think about before gifting their wealth is end-of-life care. Nursing homes and assisted living facilities can easily cost $100,000 per year. As people are living longer than ever, some baby boomers could find themselves living in a care facility for not just for three or four years but up to a decade or more.

"That is one way to really start to deplete a portfolio," she said, adding that when stress testing, it's also important to model in what happens if someone's health declines and they need long-term care.

Griffith said some of her favorite meetings with her clients are when someone comes in and says I want to gift this amount to my kids, or I want to help my kid make this large purchase.

"They're excited to do it and so am I to be able to help," she said. "But again, we want to make sure that it's a smart choice, it's an affordable choice, and not just in the time period that they're asking. You got to look beyond that as well."

Have a news tip or a story to share about passing down wealth? Contact this reporter at kvlamis@businessinsider.com.