A key marker of personal financial success is building generational wealth. If managed appropriately, generational wealth can maintain family-owned businesses, develop financial literacy for years, and generate passive income for future family members through investments. More importantly, generational wealth is about making sure your wealth can help protect future generations of your family. Many nearing retirement consider building a legacy to be a top goal beyond retirement, but building, transferring, and maintaining a legacy isn't easy.
What is Generational Wealth?
As opposed to managing finances to achieve personal goals like homeownership, retirement, or travel, Generational wealth refers to financial assets you grow beyond personal needs in order to transfer from generation to generation. Transferring this wealth from generation to generation can be complicated. Your challenge will be to ensure that you can achieve your personal goals as well as transfer wealth in a manner that is appropriate for your children or grandchildren. To do this many work with a wealth manager who understands that you need more than basic planning services.
How to Build And Transfer Generational Wealth
Education Savings Account
An education savings account is a tool you use to pay for the post-secondary expenses of a future generation. Most Americans struggle with the cost of college and must take out student loans to afford a college degree. These loans can rise to five or six figures and act as an unfortunate anchor on starting their own financial plan. Properly funding an education savings account can reduce your tax burden today, while helping a future generation get their college education. For this reason, many choose education to be a cornerstone of the legacy they hope to leave knowing that burden won't fall on the next generation.
Investing
One of the first questions you'll be asked when starting to invest is about your goals for the investment; phrased in another way, when do you need access to the money you're investing? Your planned asset allocation will vary greatly if you are 30 years from retirement, 5 years from retirement, or building investments designed to last for generations.
Investing is a key component of every financial plan, but particularly important when building generational wealth because those dollars are planned to grow for decades. As you can imagine, this isn't as simple as picking an index fund and hoping for the best. You should work with a professional to match asset allocation for your near, long, and generational-term goals.
Family Life Insurance
You don't want the best laid generational wealth-building plans to be usurped by an unfortunate event. All families need life insurance to protect their income in the event of an unexpected death, particularly when you're thinking ahead to the legacy you'd like to leave. Many life insurance policies can protect your family and even help solidify wealth-building strategies so the unexpected doesn't become an ongoing financial burden for those left behind. However, picking the life insurance policy that fits your needs can be complicated, particularly when you have a broad range of assets and goals, so partnering with a professional who can help incorporate your life insurance policy to your financial plan is highly recommended.
What is Generational Wealth Transfer?
Generational wealth transfer is the actual process of transitioning money, stocks, real estate, and other financial assets from one generation to the next. Determining which tool(s) to use is a deeply complex process, as there are many financial mechanisms available and each comes with unique costs, often in the form of tax burden. This complexity is one reason it's highly recommended to work with a professional who has experience in this area.
Generational Wealth Transfer
Proper use of numerous tools necessary to ensure that wealth moves in the most effective and tax efficient way to the next generation.
Set Up a Family Trust
A family trust can ensure the proper management of wealth by a professional after the older generation passes on. By setting up a family trust, you can reduce taxes and ensure that wealth is distributed to the next generation once they are mature enough to receive it.
Preparing an Estate Plan
An estate plan is a comprehensive document that describes what happens to your financial assets and family members, including making medical decisions and raising your children after your death if they are under 18. It is a comprehensive piece of planning that deals with financial assets and the most personal decisions you can make, and the best estate plans are developed in conjunction with a wealth manager to avoid planning gaps that can come from siloed work.
Keep in mind that an estate plan differs from a will or trust. A will is a document that outlines the specific distribution of your bank accounts, investment portfolio, retirement accounts, real estate, and personal possessions. A trust is a financial mechanism that distributes money as future generations age. Both are key components of an estate plan and must be considered alongside educational saving accounts, life insurance, or SCINs. For more on the topic, check out our comprehensive guide to estate planning.
Self Cancelling Installment Note
Are you familiar with the concept of a white elephant? This is when something intended as a gift adds undue burden to the recipient. This concept is critical when strategizing generational wealth. You don't want something intedned to help (say, gifting a poperty or a business) to end up being a weight on the financial plans of the next generation. A SCIN allows you to sell anything from a small business to a significant financial asset to a second generation, transferring that asset in a way that minimizes the impact to the financial plan of both parties from a tax perspective.
The recipient (read: buyer) of the SCIN would have to make installment payments as long as the asset's original owner is alive. However, if the original owner died while payments were being made, the payments would "self-cancel." This cancellation removes many tax burdens and any need to make additional payments on the principal or interest of the loan.
It's important to remember this is not a loophole or "easy" button, but can be a helpful tool in certain situations. The purchase price must be within what would normally be anticipated if the asset or business was sold on the open market and it cannot be used directly before someone's expected life range, but for many strategizing a longer-term wealth transfer to the next generation it can prevent unnecessary gift or estate tax burdens.
Transferring Wealth & Transferring Knowledge
Many will tell you the best laid plans of a first generation can fall apart if subsequent generations are not taught about not only personal finance basics, but the comprehensive strategy that comes with growing wealth for the entire family. It's important to be transparent with each other about the work it takes to save and grow the investments of the family and the value of continuing to let it grow if possible. We often help with this education, setting up family meetings or even family governance for high net worth individuals. Be sure to ask your advisor or wealth manager about ways you can share your investment philosophy and financial goals with children and grandchildren.
How Plancorp Can Help with Generational Wealth
As you can see, there are many complex financial mechanisms you can use to transfer generational wealth. As such, you must approach managing your personal finances, wealth management and financial planning comprehensively and holistically.
Our mission at Plancorp is to serve as your financial life advocate. We fully understand the complexities that high net-worth individuals face in building generational wealth that ensures your family can meet their long-term financial goals. We want to help you meet tomorrow's financial needs by deploying tools that fit your needs, ensuring that the next generation can access your financial assets.
Get Your Analysis
Ready to take the next step to protect your financial future? Are you confused about how to use the right financial tools to maximize the transfer of wealth? Contact Plancorp today to get financial advice tailored to your needs, and let us help you build a roadmap to financial success.
