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How to Protect Wealth over Generations

The Gilded Age was a time of rapid economic growth, creating extraordinary new wealth, materialistic excess, political corruption and terrible poverty and struggle for the lower economic classes. Famous families from this era, including the Rockefellers, Carnegies, Vanderbilts and Astors, had huge wealth. Nevertheless, not all benefited from multi-generational estate planning, says the article “Estate Planning to Protect Generational Wealth Transfers: Lessons From The Gilded Age” from mondaq.

The Vanderbilt family’s wealth came from shipping and railroad empires. In 1877, the family’s wealth was estimated at $200 million—$105 billion in today’s value. The family name continues, but with every generation, the size of the wealth dwindles. While the exact terms of the Vanderbilt estate plan are unknown, it’s understood that the family had no strategic long-term plan.

The Pulitzer family is best known for the Pulitzer Prize and the founding of the Columbia Journalism School. Two generations after Joseph Pulitzer’s death, a grandson lost most of the massive fortune in a single bad investment. Without a multi-generational plan for wealth transfer, the fortune evaporated.

The Rockefellers are known as one of the Gilded Age families that got estate planning right. They used irrevocable trusts to protect assets from wasteful spending by heirs over multiple generations. The Rockefellers created business succession plans and incorporated philanthropic goals that are still used today.

Your family can benefit from trust and estate plans, even if you’re not worth $100 billion. Creating a strategic plan to protect and transfer wealth over many generations can happen with the skilled experience of an estate planning attorney. Teaching financial literacy and shared family values, including understanding the importance of stewarding wealth and philanthropy, is as important as the money itself.

Generation-skipping trusts (GSTs) are just one means of preserving wealth transfer. With a GTS, a grandparent can leave assets in the trust to grandchildren and other beneficiaries at least 37.5 years younger. By skipping a generation, federal estate taxes aren’t paid twice on inherited assets. Trusts have also been used to offer creditor protection for generations. Divorcing parties can’t access funds in a trust.

If appropriate, there are some states where perpetual trusts are permitted. An estate planning attorney will be able to make recommendations as to whether these are appropriate for your family.

Selecting trustees and successor trustees is extremely important for wealth to last over many generations. Your estate planning attorney will also guide you in choosing either individuals or institutions to ensure trustee power is in the right hands.

Reference: mondaq (June 18, 2024) “Estate Planning to Protect Generational Wealth Transfers: Lessons From The Gilded Age”

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.

What Is Upstream Planning?

Estate planning with an eye to a future inheritance, known as “upstream planning,” can be especially important where families pass significant wealth from generation to generation. Knowing these details in advance can have a big impact on deciding on how to manage the heir’s own assets, as explained in the article “Expecting an Inheritance? Consider Coordinating Your Estate Plan with Your Parents’” from Kiplinger.

What happens when information is kept private? In one example, a patriarch refused to share any details, despite having children who had succeeded on their own and didn’t really need their inheritances. The family was left with an eight figure estate tax bill.

Clear and open discussions make sense. If a person has an estate large enough to need to pay federal estate taxes, inheriting more will add to their heir’s tax burdens. Parents may choose to leave assets to heirs through a trust. Money in a trust belongs to the trust, so in addition to tax benefits, the trust is a good way to protect assets from creditors, litigation, or divorce.

Trusts are also used to take advantage of the GST—generation skipping tax exemption. The executor of the parents’ estates can apply their GST exemption to the trust, which will not be taxed when they are distributed or passed to grandchildren, even if the grandchild is a beneficiary of the trust.

Business considerations also come into play. If a couple built and grew a business now being run by their granddaughter, and the grandsons have had little or no involvement, their wishes should be clarified: do they want their granddaughter to be the sole heir? Or do they want the grandsons to receive cash or other assets or any shares of the business?

Talking about multigenerational wealth early and often provides benefits to all concerned. The more money a family has, the more it makes sense to have those conversations and not only from an estate tax perspective. Those who created the wealth can use upstream planning as a way to start conversations about their success, family values and hopes for how heirs and future generations will benefit.

In some families, these conversations won’t happen because they think it’s too private or don’t want their children and grandchildren to feel they don’t need to work hard to become responsible citizens.

Communicating and coordinating are vital to success. Your estate planning attorney will be able to provide guidance, having seen what happens when upstream planning occurs and when it does not.

Reference: Kiplinger (Oct. 4, 2022) “Expecting an Inheritance? Consider Coordinating Your Estate Plan with Your Parents’”

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