You’ve worked hard for decades, made sacrifices along the way, and invested wisely. Now you’ve picked your head up and realized something surprising: you’re going to be more than okay. In fact, you may have been on track to have more money than you feel comfortable spending in your own lifetime.
This realization that, barring extreme circumstances, you’re pretty much set for life might lead to questions about legacy and how to be a good steward of the wealth you’ve built.
There are many advantages to being in your position, the greatest of which might be that you have a ton of options for how to move forward. You probably want to make a plan to support your children and family. Then there are the causes and charities you’ve supported over the years. Perhaps you’d rather put the majority of your wealth to use during your lifetime. Each choice has merit, and your personal values should guide your decision.
Getting Started with Generational Wealth Planning
What is generational wealth planning?
- A strategy to maintain and potentially transfer wealth across generations
- Goes beyond basic estate planning to consider family dynamics and how they may be impacted by an inheritance
- Relevant for anyone who has built more wealth than needed for their lifetime
What are key considerations for generational wealth?
- Different account types have varying tax implications
- Long-term care and estate tax planning
- Trust structures and estate documentation
- Family communication and education
What makes wealth transfers successful?
- Clear estate planning documentation
- Strategic use of trusts when appropriate
- Open communication with family members
- Professional guidance and support
Understanding Generational Wealth Planning
There’s an old adage: “Shirtsleeves to shirtsleeves in three generations.” This describes a common phenomenon where substantial family wealth often disappears by the time the grandchildren reach adulthood.
Once you’ve reached a point where you are comfortable with your own financial future, you may find yourself feeling uncertain about the impact your wealth could have on future generations. For many people, concerns center around establishing a legacy that will create ongoing financial security for their children, grandchildren, and future family.
Smart generational wealth planning goes beyond basic estate planning to help you identify strategies for maintaining and transferring wealth in a way that encourages multigenerational success.
While you might associate this type of planning with the ultra-wealthy, it matters for anyone who has built more wealth than they need for their own lifetime.
Before discussing ways to preserve and potentially transfer your wealth, let’s look at some specific strategies that can help support your wealth planning goals.
Maintaining Generational Wealth: Account Types
As you know, choosing the right kinds of accounts for your money have a big impact on your long-term goals. Here are some account types you can leverage for the smooth transfer of your wealth to future generations, if that is what you decide to focus on.
529 Plans: A Flexible Education Tool
529 plans have specific advantages for multigenerational wealth planning. One notable benefit is the ability to change beneficiaries without tax consequences. This means you can name your child as a beneficiary now, and they can later transfer the benefits to their own children.
You may even choose to “front-load” these accounts with five times the annual gift exemption without the need to file a gift tax return. These combined benefits can form a tax-efficient way to fund your grandchildren’s education (potentially even before they’re born!).
Non-Retirement Assets
Standard brokerage accounts, real estate holdings, and business assets carry a valuable tax benefit: they receive a step up in cost basis upon your passing. This means any potential taxes associated with your gains over the years will be wiped out. This favorable tax benefit makes these types of assets particularly attractiveto the person inheriting them.
Traditional Retirement Accounts
Traditional IRAs and 401(k)s introduce certain challenges to inheritance planning. Current rules require beneficiaries to deplete the accounts within 10 years of inheritance. This timing could coincide with your children’s peak earning years, potentially pushing them into higher tax brackets. You might not be too concerned with your children having to pay taxes, but if you would like as little money as possible to be gobble up by Uncle Sam, it’s worth considering strategies to reduce these account balances during your lifetime.
Maintaining Generational Wealth: Other Considerations
Building wealth is an accomplishment, but safeguarding it for future generations requires thoughtful planning and proactive strategies. Here are a few more things to consider that might affect your long-term wealth preservation goals.
Sustainable Spending and Withdrawals
If you’ve reached a point where your available funds exceed your lifestyle needs, traditional spending calculations may not seem like a critical consideration. Understanding your sustainable withdrawal rate, however, can still help inform your long-term planning decisions. The sustainable withdrawal rate can be considered in tandem with your goals of supporting others. Meaning, how much can you afford to give away to others (either directly or through irrevocable trusts) without jeopardizing your own long-term finances.
Long-Term Care Costs
Getting old costs money! Health care needs in later years can significantly exceed your “regular”spending. While you may have the resources to pay out of pocket for potential long-term care costs, it’s still a smart idea to understand how these costs will impact your overall financial situation.
Long-term care insurance offers another approach. Though premiums can be significant, this coverage might preserve more of your wealth should you need care. The choice between self-funding and insurance coverage depends on your specific situation and goals.
Utilizing Life Insurance
Depending on current laws, your estate could face federal or state-level estate taxes. While your estate may have enough available assets to cover these costs directly, several solutions can help address this potential burden.
One effective strategy uses a permanent life insurance policy owned by an Irrevocable Life Insurance Trust. This structure keeps the insurance proceeds outside your estate and can help offset estate tax costs for your beneficiaries. When considering this approach, you’ll need to weigh several costs: the insurance policy premiums, initial trust creation expenses, and any ongoing trust administration fees.
Transferring Generational Wealth
If you choose to transfer the majority of your wealth to future generations, there are several things you can do to help create a successful transition. A well-structured plan combines legal documentation, clear communication, professional guidance, and if we’re being honest, a little luck.
Create an Estate Plan
A clear estate plan provides the foundation for any wealth transfer strategy. This includes creating a will, establishing trusts when needed, and keeping your beneficiary designations current. These documents outline your wishes and help direct your assets to the right people at the right time. All estate plans should include basic estate documents and beneficiary designations at a bare minimum.
Using Trusts
Trusts offer various levels of control over how your wealth transfers to the next generation. You can specify that funds support specific goals like education or home purchases. The trust might distribute assets at certain age milestones or under particular conditions. Some trusts include provisions to protect assets from creditors or address substance abuse concerns. A professional trustee can provide objective oversight and accountability for these arrangements.
Advanced Estate Planning
For estates that might face federal or state estate taxes, additional planning techniques can help preserve more wealth for your beneficiaries. A Spousal Lifetime Access Trust (SLAT) provides a potential solution for federal estate tax concerns, while a Credit Shelter Trust strategy might work better for state-level estate taxes.
A thorough review of your estate plan can also help your assets bypass probate court. The probate process can be time-consuming and expensive, and its public nature means anyone can access details about your estate. Private transfers often work better for families who value discretion about their financial matters.
Communicate With Family Members
Many wealth transfers fall short of their goals due to lack of family communication and education. The statistics tell a sobering story: 70% of wealthy families lose their wealth by the second generation, with 90% losing it by the third generation. However, this outcome isn’t inevitable. Taking time to educate future generations about your family’s assets, their location, and intended purposes can help maintain your wealth across generations. Regular family discussions about financial matters often make the difference between successful and unsuccessful wealth transfers.
Introduce Future Generations to Your Advisors
Building relationships between your family members and trusted financial professionals creates continuity in your wealth management strategy. These advisors understand your goals and can provide guidance to your beneficiaries after the wealth transfer occurs.
Final Thoughts
Planning for generational wealth involves many moving parts. While technical planning tools like trusts can help direct your wealth, they work best when combined with practical financial education for your family members.
If you’re concerned about how future generations might handle inherited wealth, consider investing time in their financial education now, rather than trying to control every aspect through legal structures. Getting your children started with their own investment accounts can help them understand market volatility and develop sound financial judgment. Your financial planner can be a valuable resource in this educational process.
At SK Wealth, our financial advisors have been helping clients navigate complex wealth planning decisions for 25 years. Through our Integrated Financial Advantage™ process, we create personalized recommendations that align with your goals and family circumstances, helping you make confident decisions about your legacy. We understand that each situation is unique and requires careful consideration of all available options to create the most effective wealth strategy for your family’s future.
