You worked hard for everything you have. Why wouldn’t you put in the effort to preserve it for your family? Proper generational wealth management will ensure your descendants benefit from your lifetime achievements.
You’ve worked all your life for everything you have. Your dream? To leave a foundation of wealth for your children, grandchildren, and their children to come.
However…are you familiar with the saying “shirtsleeves to shirtsleeves in three generations”? This old adage means that accumulated wealth, in most cases, tends to deteriorate around the third generation. The farther in time you travel from the source point, the less capable descendants seem to be at managing their predecessors’ fortunes.
How, then, can high-net-worth individuals be proactive about protecting what they’ve worked so hard to nurture and build? The answer lies in planning. Let’s look at several strategies that can help ease the transfer of long-lasting generational wealth.
Establish and Revisit Your Estate Plan
Your estate plan is one of the most important tools you have in managing generational wealth. It is especially useful if you want to retain your authority to divide and distribute your assets. Estate planning is the tool that allows you to dictate the details of when and how your wealth will pass on, and to whom. Most importantly, estate plans can help keep those outside the family from interfering with your personal affairs.
Furthermore, without a proper plan in place, your assets could be subject to heavy, unnecessary taxation, reducing the amount your family actually inherits. A wealth advisor’s expertise is critical here; their job is to help you utilize retirement funds, trusts, and other tax-advantaged accounts in your best interest.
The more assets you have, the more cumbersome estate planning can become. That’s why many experts suggest getting an early jump on the process. Estate planning breaks down into four general steps, with several moving parts in between.
- Take inventory. Conduct a clear-eyed assessment of all your assets, including real estate, bank accounts, retirement accounts, and investments. Be sure to also include any valuable personal property, along with debts and mortgages you still owe.
- Create a plan. Now it’s time to name your beneficiaries—those who will receive your assets after you pass away. Consider also naming several backup beneficiaries, should something happen to your primary. You’ll then decide how to distribute your assets, either with a will or trusts.
- Execute. Once the plan is set, it’s time to sign the documents. Your attorney and wealth advisor should assist you in identifying all the necessary paperwork to solidify your plans.
- Revisit and reassess. Once you establish the contours of your estate plan, it’s imperative that you re-evaluate the details every so often. Your assets may grow over the years. Perhaps you’ve acquired a new piece of property or started a new business. Regular meetings with your wealth advisor can keep your generational wealth goals on track as circumstances change. Getting an early start on these steps also gives you plenty of time to amend your plans in the future.
Protect Your Generational Wealth Through Trusts
Trusts can be one of the best ways to grow and maintain generational wealth while saving on taxes. There are several kinds of trusts, but they all exist to achieve the same general purpose: they are legally-binding vehicles built for transferring assets between parties.
In many cases, those parties are a parent (grantor) and their children (beneficiaries), with a third-party trustee to oversee distributions and management. One key advantage of trusts is that they avoid tying up your estate in probate court.
It’s a trustee’s job to manage the trust as the grantor intended. For example, if you, as a parent, don’t want your children to just receive a lump sum of cash upon your death, you could control the distribution of your assets by placing them in a trust. Then, you’d instruct the trustee to make annual fixed distributions from the account to your children.
Trusts can function as some of the most simple and secure vehicles for passing along generational wealth. If you choose to implement one, you must first understand the different kinds of trusts available, and their tax implications.
Testamentary Trusts
You can establish testamentary trusts within your will which only actuate after you pass away. Therefore, to make any changes you’ll have to make changes to your will. The nuance added by the testamentary trust to a basic will lies in how the money transfers to your children, especially young children.
With a basic will, the money transfers to beneficiaries in a lump sum and may be subject to creditors if the child files for bankruptcy. On the other hand, a primary reason for placing funds in a designated trust is to keep them safe from creditors (until the funds are withdrawn). Furthermore, since the trust owns the assets and the trustee can distribute them over time, rather than lump sum payment upon death, their transfer may not affect a child’s eligibility for college aid.
Revocable Trusts
The defining feature of revocable trusts is the grantor’s ability to alter their terms. Additionally, income earned through assets in a revocable trust may be distributed to the grantor. Since the grantor can alter the trust, they can choose to either put this back into the trust, or use it as an income source. However, assets within a revocable trust count towards the estate and are vulnerable to creditors since they’re still technically under the grantor’s ownership. Additionally, when the grantor passes, the assets in a revocable trust become subject to state and federal taxes.
Irrevocable Trusts
Perhaps the most important consideration with an irrevocable trust is the fact that a grantor cannot alter an irrevocable trust without the permission of the named beneficiaries. The grantor relinquishes their ownership of all assets within the trust, so they don’t count towards their final estate, thus potentially saving on estate taxes. The assets are also shielded from creditors, as the trust technically owns them.
Adopt a Long-Term Investing Strategy
High-net-worth individuals may consider long-term investments as a means of securing generational wealth. While these often take time to realize, the low-risk nature of long-term investments could save on taxes while generating future wealth. Over a 64-year period (1957-2021), the S&P 500 had average returns of around 10.5% per year. While a double-digit return isn’t guaranteed, those numbers indicate that long-term holdings can potentially act as a haven for generational wealth.
Understanding your long-term investment goals and timelines is critical here. Typically, investors hold long-term investments for a minimum of five years. But some long-term goals may stretch two or more decades out. So how should you invest based on your goals?
Those looking to secure generational wealth have several low-risk investment options available to hold and grow money for decades to come.
Dividend Stocks
Many experts consider dividend-paying companies to be good options for long-term investors. Since they have the ability to generate income, dividend stocks often prove to be attractive investments for retired investors looking to make money in their golden years. The consistent revenue stream can build generational wealth after you pass.
Stock Funds
Exchange traded funds, (ETFs) and mutual funds may also be attractive options for long-term investors. The nature of these funds (S&P 500 index or Nasdaq-100 index) can help you build a diversified portfolio of relatively safe, long-term investments.
Bond Funds
Buying into bonds can function as a complement to stock funds. By purchasing many bonds across various issuers, the diversity of your portfolio lessens the impact if one defaults. The risk associated with bonds depends on the issuer. Corporate bonds generally come with more risk of default, whereas government-issued bonds are typically considered safer—but usually generate less interest than corporate bonds.
More Aggressive Investment Alternatives
Investors also have a few higher-risk options to consider—especially when raising money to meet short- or mid-term goals like college funds or down payments. By working with an investment professional or wealth advisor, you can take a more aggressive approach to investing that balances the need for diversification (and controlling for risk) against better returns.
Explore Gifting Strategies
High-net-worth individuals can use gifts as a means to pass along generational wealth while minimizing taxes. However, gift taxation can prove complicated to navigate—which is why a wealth manager can be beneficial. Understanding who pays taxes on given and received gifts is the first step in developing a strategy for a low-tax gift transfer.
Under current law (2022), you may gift up to $16,000 to as many people as you please without filing gift taxes. So, if you have three children, you could give each of them $16,000 (for a total of $48,000) without filing a gift tax return. Additionally, they don’t have to pay taxes on that money. However, these gifts are not deductible unless they’re going to an IRS-approved organization. At that point, they function more like charitable donations.
Gift-giving becomes particularly tax-advantaged when your estate is valued over $12.06 million—which is the maximum lifetime exemption for estate taxes and gifts in 2022. Any estate value over the exemption will be taxed. However, gifts within the $16,000 yearly exemption do not count towards that lifetime total. So, if your estate is valued at $12.38 million, you could theoretically gift $16,000 to 20 different people that year and bring your estate down to the $12.06 million mark. Practically, you’d spread those gifts out over several years to keep it in your family (since you generally can’t gift someone $16,000 twice in one year and avoid gift taxes).
POLARIS PRO TIP: Do you know the differences between the Unified Gift for Minors Act (UGMA) and Unified Trust for Minors Act (UTMA)? For many years, the UGMA was the standard for securing future wealth for minors. However, about 20 years ago, UGMA was functionally replaced by UTMA. They operate relatively the same; however, the UTMA allows you to extend the account’s maturity date to your child’s 25th birthday. If they’re approaching the age of majority (18 years old in most states), but you don’t believe they’re mature enough to handle the money in the account, the UTMA allows you to delay the transfer. The UTMA also allows a broader array of assets to be donated to the account, where the UGMA was limited to cash, life insurance, stocks, and annuities.
Create a Safety Net With Life Insurance
When people think about life insurance, they generally focus on the death benefit received by loved ones after they pass away. However, you could also consider using life insurance as a tool to pass along generational wealth when planning for your beneficiaries to get the most out of their inheritance. The tax-advantaged nature of these insurance policies can make them valuable estate planning tools.
Death benefits paid via a life insurance policy are generally safe from taxation, albeit with a few exceptions. For example, if the policyholder names the estate as the beneficiary rather than an individual, the death benefit counts towards the estate and falls under applicable estate taxes. When your estate exceeds the $12.06 million exemption threshold, the death benefit can help offset the cost of additional taxation. Premiums paid into the policy are also deducted from the estate, and so are not taxed.
In any case, consult your wealth advisor to determine if and how your life insurance policy will safeguard the passing of generational wealth. Having a qualified expert’s guidance can not only help you navigate your individual circumstances, but also bring you great peace of mind.
Secure Your Family’s Wealth for Generations—Talk to an Advisor Today
You’ve run the race, working hard for everything you own. Shouldn’t you put the right safeguards in place to preserve it for your family?
Proper generational wealth management can help ensure your descendants benefit from your lifetime achievements to the highest degree possible. However, that can be difficult to orchestrate on your own if you do not understand the intricate details of passing your estate to your heirs.
Thankfully, wealth advisory experts are on hand to answer any questions you have about maintaining generational wealth. Reach out to Polaris Wealth Advisory Group today to lay the foundation for your family’s financial future.
This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Polaris Wealth Advisory Group unless an investment management agreement is in place.
