The Great Wealth Transfer | Why Unique Assets Are Key to Securing Future Generations of Wealth

As we approach the "Great Wealth Transfer," the $84 trillion held by the Baby Boomer generation will be passed on to the next generations, charitable organizations, and universities. While much of this wealth will be liquid assets like cash and stocks, a significant portion—estimated at 43%—will be unique and hard-to-value assets. These include real estate, small businesses, collectibles like cars or guitars, and natural resources like oil and gas.

What Makes Unique Assets Different?

Unlike cash or publicly traded stocks with clear market values, unique assets often don't have an active market, making their valuation more complex. Trust officers and asset managers are usually comfortable with liquid, fungible assets. Still, there's often resistance to handling unique assets due to their lack of liquidity and the specialized expertise they require. However, avoiding these assets means missing out on a large portion of wealth, which could be detrimental given their growing prominence.

Managing these assets involves specialized tools and knowledge. Unique assets, such as mineral rights, require custom management software and processes that traditional trust accounting systems can't handle. This specialization is crucial for compliance and for ensuring that audits run smoothly. For example, managing a mineral asset in oil and gas differs vastly from managing a stock or bond. While the latter is easy to track, oil and gas royalties depend on fluctuating prices, and different assets, like real estate or collectibles, require their management systems.

The Role of Oil and Gas in Wealth Transfer

Oil and gas assets, particularly mineral rights, play a prominent role in this transfer of wealth. These assets are often bought with the long-term view of holding them across generations. However, their value is influenced by market conditions, particularly the price of oil and gas. When prices are high, these assets' value increases, but their value can drop significantly during a market downturn.

For example, one key factor in determining the value of mineral interests is the price of oil and gas. A high-producing field's value will generally be higher when oil prices are up, as it generates more revenue. Conversely, during periods of low prices, the value drops. In addition, the value of a mineral asset is also affected by factors like reserves—how much oil or gas is left in the ground.

Valuations are significant for tax purposes. Oil and gas assets are taxed similarly to real estate, with annual valuations needed for ad valorem taxes. Trust officers and asset managers must ensure that valuations are accurate to avoid over-taxation and protect the family wealth.

Emerging Trends in the Unique Asset Market

In recent years, we’ve seen significant trends among ultra-high-net-worth investors in unique assets. One trend is the growing interest in unified estates, where surface and mineral rights are bundled together. This trend is especially prevalent in states like Texas, where land grants from the 1700s still hold significant mineral value. Investors are increasingly looking to acquire these unified estates, with some opting to sell the surface estate while retaining the mineral rights.

Another trend is the rise of alternative energy investments. Oil and gas are no longer the only energy game in town. Large-scale wind and solar projects are being developed and come with legal and logistical challenges. The accommodation doctrine, which traditionally favored mineral rights over surface rights, is being challenged as wind and solar projects grow. These changes are reshaping the way investors view land use and energy rights.

Additionally, the potential of CO2 storage technology is becoming a new frontier for oil and gas assets. As efforts to combat climate change grow, there’s increasing interest in the potential for underground CO2 storage. This new use of mineral space is causing legal debates, particularly about who owns the right to the pore spaces where CO2 can be stored.

The Long-Term Outlook: Diversification into Unique Assets

Diversifying into unique assets has proven to be a successful strategy for many ultra-high-net-worth individuals. Take the case of a family whose grandfather traded boots for mineral rights in the early 1900s. What seemed like a small, inconsequential trade at the time has turned into millions of dollars in wealth. Similarly, during the Great Depression, many who owned large swaths of land and faced financial struggles became multimillionaires when oil was discovered on their property decades later.

These stories highlight the long-term potential of unique assets, mainly when passed down through generations. Despite its boom-and-bust nature, the oil and gas industry has created significant wealth for those who held on to their assets through tough times. The same can be said for other forms of unique assets, like real estate, art, and collectibles, which often appreciate over time.

The Great Wealth Transfer is underway, and with it comes a new focus on unique, hard-to-value assets. These assets require specialized management and expertise, but their growing prominence is undeniable. As wealth continues to shift across generations, those managing unique assets must adapt to new trends, understand the impact of market fluctuations, and ensure that valuations are accurate for tax and legal purposes.

The Great Wealth Transfer represents a significant opportunity for those prepared to manage and capitalize on unique, hard-to-value assets. Whether it’s mineral rights, real estate, or collectibles, having the right tools and expertise is essential for maximizing their value and ensuring a seamless transfer across generations.

Listen to our Tech It Up podcast, as we dive into the fascinating world of unique assets. Featuring Taylor Franklin, Oil and Gas Portfolio Manager, and Sam Katigan, VP of Unique Assets at SS&C Innovest, the discussion uncovers the untapped potential of real estate, oil and gas interests, notes, mortgages, and collectibles.

To learn more about how SS&C Innovest can help you navigate the complexities of managing these assets, visit our website for more information, or request a demo.