Estate Planning Blog Articles

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Can Estate Planning Address ‘Third Generation Curse?’

Have you heard of the “Great Wealth Transfer?” It’s the period when Baby Boomers are projected to pass trillions of dollars to the next generation, according to a recent article from Kiplinger, “How Estate Planning Can Thwart the ‘Third-Generation Curse.’”

The anticipated $84 trillion expected to be bequeathed to Generation X, Millennials, and Gen Z beneficiaries sounds enormous, but the third-generation curse may leave heirs with far less than expected. Often, wealth is earned by one generation, grown by the second generation who witnessed firsthand how hard their parents worked to maintain their wealth, and mismanaged or wasted by the third generation members, who are too far from the original wealth creation to respect it.

Creating or updating an estate plan to protect family wealth from the third-generation curse requires communication between generations centered on the values leading to wealth creation and a financial education on how to preserve and grow wealth.

Many estate plans are structured to address tax planning, but that’s only one aspect of estate planning. Communicating the “why” of the estate plan, including where the money came from, how it has been stewarded over the years, and what needs to happen to protect it, will help beneficiaries have a deeper regard for their inheritance.

Boomer values may differ from their heir’s values, but they may also be similar, as they use different language to describe the same thing. Clarifying these values and communicating with heirs may help to give context to their inheritance and its importance.

Understanding your priorities and values should ideally lead to an estate plan reflecting your wishes. For instance, if the family prizes education, your estate planning attorney may advise you to create a trust to fund advanced education. Such a trust should be accompanied by a letter of intent explaining your wishes and values to both trustees and heirs.

If you’re unsure about mandating the use of funds, you may have your estate planning attorney create a discretionary trust with a similar letter explaining what you’d like them to use the funds for and why it’s important to you. Because circumstances change, the trustee will have the flexibility to distribute the funds as they see fit.

When the estate plan is completed, have a series of conversations with family members about what’s in the plan and why. They don’t need to know every detail, but broad strokes will go a long way in letting them know what you’ve done, your wishes, and your hopes for their future.

Reference: Kiplinger (March 12, 2024) “How Estate Planning Can Thwart the ‘Third-Generation Curse’”

Strategies to Build and Preserve Generational Wealth

Generational wealth is a topic of immense importance. It represents the financial legacy one generation leaves for the next, enabling families to build a stable foundation for their descendants. However, preserving this wealth for future generations requires careful planning and management. This article delves into the intricacies of preserving generational wealth and the strategies wealthy families employ to ensure that their assets last for generations.

What Is Generational Wealth?

Generational wealth refers to assets passed down from one generation to the next. This can include property, money, stocks, businesses and other valuable resources. Many wealthy families aim to grow their wealth over time, ensuring that their future generations benefit from their hard work and financial acumen.

How Do Families Build Generational Wealth?

Building generational wealth isn’t just about accumulating assets. It’s a process that requires a strategic financial plan, sound investment decisions and a commitment to wealth preservation. Diversifying investments is critical in building generational wealth and ensuring security and potential growth across multiple sectors.

Why Do Many Families Lose Their Wealth?

Surprisingly, a vast majority of wealthy families lose their wealth by the second generation. A lack of financial literacy, poor investment choices and mismanagement can erode family wealth over time. Proper planning and education among family members can mitigate these risks.

How Can You Preserve Generational Wealth?

Preserving generational wealth involves a multi-pronged approach:

  1. Estate Planning: Crafting a comprehensive estate plan ensures that assets are distributed according to your wishes. This often involves setting up a trust, which offers more control over the distribution and use of assets, while also offering potential tax benefits.
  2. Investment Strategies: Diversifying investments can protect generational wealth from market fluctuations. This can include a mix of stocks and bonds, real estate and alternative investments.
  3. Insurance: A life insurance policy can provide a financial safety net, ensuring that beneficiaries have the necessary resources, even if the primary breadwinner dies.

Why Is a Trust Essential for Wealth Preservation?

A trust is a legal entity that holds and manages assets for the benefit of certain individuals or entities. For wealthy families, trusts are often a cornerstone of their wealth management strategy. A trust can protect assets from creditors, ensure that they’re used according to the grantor’s wishes and provide tax benefits.

What Role Does Investment Play in Protecting Wealth?

Investment plays a pivotal role in preserving and growing generational wealth. With the right investment strategies, families can grow their wealth through multiple generations, ensuring that assets don’t just remain static but appreciate over time. Seeking advice from a registered investment advisor can offer tailored recommendations to maximize returns and minimize risks.

How Can Financial Planning Secure Your Family’s Future?

A holistic financial plan can guide a family’s spending, saving and investing decisions. It offers a roadmap to achieve financial goals, ensuring that assets are preserved and grow. Moreover, financial planning promotes financial literacy, equipping the next generation with the knowledge to manage and build upon their inherited wealth.

Is Education Crucial in Wealth Preservation?

Absolutely. Financial literacy and an understanding of how to manage and invest wealth are paramount. Wealthy families often prioritize educating their heirs about finances, investments and the responsibilities that come with great wealth. This ensures that future generations can make informed decisions and avoid pitfalls that can erode their inheritance.

How Can One Prepare for Unforeseen Challenges?

Life is unpredictable. Economic downturns, personal tragedies, or changes in estate taxes can pose challenges. It’s vital to have contingencies, like a robust estate plan, insurance coverage and diversified investments, to navigate these challenges without compromising generational wealth.

Summary:

  • Generational Wealth is the legacy passed from one generation to the next.
  • Building this wealth requires a strategic financial plan and diversified investment.
  • Trusts play a pivotal role in a family’s wealth management and preservation.
  • Financial literacy and education are vital to ensure that future generations can manage and grow their wealth.
  • Proper preparation and planning can help families navigate unforeseen challenges and ensure that their wealth lasts for generations.

Ever Wonder How the Very, Very Rich Pass Wealth to Their Children?

When making plans to pass assets on to family members, it’s important to consider how estate planning can help manage the taxes associated with inheritances, says a recent article, “Here’s How the Ultra Rich Pass Wealth Tax Free to Their Heirs” from yahoo! finance. The very rich have used many strategies to pass on wealth with limited or no taxes owed, and some of these strategies can be used by regular people too.

The annual gift tax exclusion. Transferring wealth during your lifetime, rather than after your death, allows you to gift any number of people up to $17,000 each in a single year without incurring a taxable gift and having no impact on your estate and gift tax exemption. Married couples may give up to $34,000. People often use this annual exclusion for cash gifts and deposits into 529 education savings plans. These plans permit “frontloading” of up to five years’ worth of gifts into one year, which results in longer and more significant compounded growth.

Paying directly for medical care or tuition. If you wish to help a loved one pay for healthcare needs or education costs, the way to do this is to pay the institution directly. You may make unlimited payments to medical providers or educational institutions on behalf of others for qualified expenses without incurring a taxable gift or impacting your $17,000 individual gift exclusion. In addition, qualified medical expenses would be considered deductible for income tax purposes. Educational expenses are tuition, not living expenses or dorm fees. However, educational expenses aren’t limited to college and could be for a private school at the primary or high school level. Even certain daycare and afterschool activities might qualify.

Using the lifetime gift and estate tax exemption. One of the best estate planning tax strategies is to gift assets you expect to have significant appreciation in the future. For example, you have a $100,000 investment in a tech start-up you believe will appreciate ten times over the next five years. Of course, gifting the $100,000 investment today makes you eat slightly into your gift and estate tax exemption. All the future appreciation of the investment is still out of your taxable estate and into the hands of your heirs—estate and gift-tax free.

Converting IRAs to Roth IRAs. The SECURE Act’s 10-year rule eliminated the ability to ‘stretch’ inherited IRAs over most beneficiary’s lifetimes. A way to preclude the tax burden on your heirs from an inherited IRA is to convert it to a Roth IRA. You’ll pay the taxes at the time of conversion, but they won’t have to pay taxes upon inheriting the IRA or any future appreciation in the account.

Implementing discount strategies. This is a complex strategy used for transferring family businesses or real estate. Discount strategies reduce the value of an interest before its transfer to its value for gift tax purposes is reduced. You maintain some control or benefit from the asset after the transfer. Examples are FLPs (Family Limited Partnerships), Limited Liability Companies (LLPs) and Qualified Personal Residence Trusts (QPRTs).

Reference: yahoo! Finance (May 25, 2023) “Here’s How the Ultra Rich Pass Wealth Tax Free to Their Heirs”

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