Generational Wealth Management: How to Pass Down Your Assets Safely and Tax-Efficiently

What is generational wealth? That’s wealth that lasts and benefits others beyond when you pass away. While it would seem that creating wealth in the first place is the hardest part, that’s not necessarily true. There’s nothing easy about keeping it in the family. A 20-year study by The Williams Group found that two-thirds of family wealth doesn’t even survive into the next generation.i What can help make a difference? Generational wealth management.

Why You Need a Generational Wealth Management Plan

Generational Wealth Management:  How To Pass Down Your Assets Safely And Tax-efficiently

Building a significant net worth can take decades of hard work, discipline and sacrifice. But these are entirely different skills than it takes to keep wealth intact. It’s even harder to pass that wisdom down to your children, then expect them to later ingrain these habits into their own kids.

Fortunately, some wealth management strategies can take the human factor out of the equation. The key is to put these in place early, before any damage is done.

How Does Generational Wealth Management Work?

Generational wealth management encompasses many disciplines, including retirement planning, estate planning, probate and trust administration, inheritance planning, and tax planning. Here is an overview of the steps involved.

  1. Begin with retirement planning. The first question is, how much will you have to leave behind? The only way to determine that with any level of confidence is through retirement planning. In this process, you’ll figure out how much you need so you can calculate what is estimated to be left behind. Then, you’ll be ready to start planning to manage that residual wealth.

At Lohr & Company, we use a proprietary retirement strategy called the 4 Buckets Income Strategy. The purpose of this strategy is to help retirees better understand how retirement income needs are being met from their different retirement assets. An additional benefit from implementing this strategy is greater clarity on how much could potentially be available for legacy purposes. Not only the value of these assets but the appropriate financial vehicles to maximize their value and enhance tax efficiency.

  1. Identify who will receive your assets. Will your money go to your family, your favorite charities, or a combination? With generational wealth it will likely go into a trust first for the benefit of these beneficiaries over time. (We’ll cover trusts in a minute.)

But if you pass assets down, that means putting together an inheritance plan. How will you fairly split assets among family members? Keep in mind that it may require more thought and discussion than simply splitting things equally. In family businesses, those children participating might be better suited to inherit more of the company. At the same time, non-participating kids might be better off receiving other types of assets. Also, some of your heirs may be responsible with money, but others may not be. Here again, there are strategies and structures you can employ to help ensure your assets survive.

  1. Start your estate planning. Now, you need to do some estate planning to help your heirs receive those assets (or the income generated off those assets) legally and tax-efficiently. This can be created with the help of your wealth advisors if they provide comprehensive financial planning services. Your wealth advisors will help communicate the strategy to your estate planning attorney who will then draft documents to make these wishes legal and actionable.

  2. Communicate your plans early and often. This is one step too often forgotten, which may contribute to the early obliteration of a family fortune. Ideally, you should work with your family to create a vision for what can be accomplished with family resources. Along with this, you can discuss wealth preservation and stewardship. Yes, many people find this awkward. But a high quality financial advisor will usually be experienced with this and can help outline the process.

Don’t forget financial education. You want all heirs to be well-educated in budgeting, managing wealth, avoiding fraud and other practical topics. Frequent family conversations about the responsibilities that go with wealth can help prevent excess spending or impulsive decisions after you’re gone. This is also where integrating your financial advisor into the conversation can be invaluable. This way, family members can get into the practice of consulting an advisor before making important financial decisions.

Do I Need a Trust or a Will (or Both)?

Typically, you’ll need either a will or a trust for your estate plan. But when more money is at stake, a will can only go so far. Here’s a big difference: a will can direct where assets will go. However, once distributed, you lose control.

In contrast, a trust lets you control how your heirs use those assets. You can define when money will be released and for what purposes it may be used. Especially with generational wealth, this ability to limit how money can be used is vital. It can mean the difference between your 22-year-old son using funds for a new truck and a boat or using it for a down payment on a home and college tuition.

A trust can also help with your philanthropic efforts. In that case, you can dictate how your funds will be used to feel more confident that you’ll be furthering the work you care about.

However, along with a trust comes added complexity. Here’s a look at the pros and cons to help you decide if setting up a trust is right for you.

Generational Wealth Management:  How To Pass Down Your Assets Safely And Tax-efficiently

Potential Benefits of a Trust

  • Control: Trusts allow you to direct the use and timing of funds, giving you more control of resources after you’re gone.

  • Asset protection: Most trusts can help shield personal assets from business creditors and make your family a less attractive target for litigation. Trusts can also help keep money in your family in the case of future divorce.

  • Privacy: Trusts can help keep your family’s assets private, so there’s less information available in public records.

  • Taxes: Certain trusts may also offer tax benefits such as the ability to defer or lower taxes.

  • Avoid Probate: The probate process is known to be slow and expensive, but that’s not always the case today. Especially for smaller estates, many states have created a simplified process that can go quickly. Regardless, a properly managed trust will avoid the probate process, which can simplify matters.

Potential Drawbacks of Trusts

  • Cost: The initial expense of setting up a trust can be costly. Then, you will have annual costs to manage the trust properly.

  • Administration: The trust must be administered correctly to maintain benefits, but this can sometimes be confusing and complex.

  • Irrevocable: Many types of trusts are permanent and can’t be changed even if you change your mind.

  • Requires Accuracy: To gain the benefits of the trust, assets need to be put into them correctly. That means titling or deeding all assets properly.

  • Ownership: You transfer ownership over to the trust, so you technically no longer own those assets.

  • Law changes: Future law changes may impact a trust, which may change the benefits your family receives in the future.

What Type of Trust is Best for Generational Wealth Management?

There are several types of trusts out there suited for a variety of uses. The most common type used for generational wealth management is an irrevocable trust. This type of trust permanently transfers assets into the trust. Then those assets are managed by the trustee(s), and distributions are made according to the terms of the document.

Because it can’t be changed or revoked, an irrevocable trust is capable of helping protect assets for future generations. In some cases, other types of trusts may be useful as well for protecting your legacy. Those can include revocable living trusts, testamentary trusts, special needs trusts, charitable trusts, and spendthrift trusts. Each trust has different advantages and features but may play a role in your overall plan.

Who Should I Name as My Executor/Trustee?

Many people automatically name one of their children as their executor or trustee. That can sometimes be a mistake. If you name one of multiple siblings, this can often cause conflict and damage their long-term relationships. Also, it can create an enormous burden on the one you designate. reports that an executor can expect to spend about 570 hours to settle an average-sized estate. For larger estates over $5 million, this number can easily double. ii Bottom line, this often turns into a significant and emotionally trying experience.

If naming a family member, you want to identify someone who acts with integrity and honesty. They must be organized, responsible and be willing to seek professional help when needed. There will inevitably be elements of estate administration of which a lay executor or trustee will be unfamiliar.

Another option is to name an independent third party, such as a trusted accountant, as the trustee. While there will be an expense, this can go a long way in maintaining harmony in your family after you’re gone.

Generational Wealth Management:  How To Pass Down Your Assets Safely And Tax-efficiently

What are the costs for creating and managing a trust?

The creation of trusts can be charged on a flat fee basis rather than an hourly basis. Many attorneys work on an hourly basis and bill accordingly, but it may be helpful to know the costs ahead of time through a flat fee schedule. These schedules typically have estate planning packages ranging from simple will creation to more robust trust work. Costs for these packages can often range from several thousand dollars to figures five times this amount. But the security and peace of mind that comes with this documentation is worth it.

Once a trust is activated, a trustee will manage the assets for the benefit of the beneficiaries. A trustee, as mentioned, can be a family member or a professional trustee with a background in finance, law or tax. Costs for corporate trustees often range from 0.25%-1.50% per year based on the underlying value of the trust. However, larger trusts may have a tiered schedule that charges lower administration percentages at different thresholds.

The Role of Tax Planning in Generational Wealth Management

Another big part of your wealth management strategy should be tax planning. You’ll have both estate taxes and income taxes to keep in mind. Income taxes come into the picture in the year of the death of the decedent. They then reappear depending on the type of assets left to your heirs. Many retirees own tax-deferred accounts such as IRAs or 401ks. With these, most non-spousal beneficiaries are required to take required minimum distributions each year for 10 years until the funds have been fully distributed. These tax-deferred accounts have avoided tax revenue for too long and the federal government wants its share! That means income taxes to your beneficiaries.

Our 4 Buckets Income Strategy gives retirees a clearer picture of their retirement income and their residual assets. Many retirees choose to let required minimum distributions (RMDs) dictate when they take income. This may not be wise. We help retirees strategically take income throughout retirement at lower rates than what their heirs would likely have. We also incorporate tax advantages through Roth conversions and cost-basis step-ups to create a tax-free estate. A $500,000 taxable estate is likely not as valuable as a $400k tax-free estate to your heirs.

Starting early can make it easier to find strategies to minimize taxes now for you and later for your heirs. At Lohr & Company, we emphasize this aspect for clients, since smart tax strategies can make a significant impact on your long–term wealth.

Putting it All Together

Generational Wealth Management:  How To Pass Down Your Assets Safely And Tax-efficiently

As you can see, there are many facets to this process, including but not limited to retirement planning, estate planning and tax planning. That’s why selecting the right financial advisor is critical. While a wealth advisor at a broker-dealer can provide investment advisory services, that’s only part of the equation.

Your best bet is to find a full-service firm that will act as your fiduciary, meaning they are legally required to put your interests first. That usually means finding an SEC-registered investment advisor (or “RIA”).

Key Takeaway

Unfortunately, statistics tell us the odds are stacked against your family wealth sticking around after you’re gone. However, following these steps can help prevent that from happening. Just remember to keep your family in the loop. Not only will that help with wealth preservation… it can also improve family ties in the process as you share your legacy, values and vision.

Ready to learn more about protecting your family’s assets?

Please contact us to schedule a complimentary consultation.

Lohr & Company, LLC does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.
Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Advisor. Fixed insurance products and services are separate from and not offered through Commonwealth Financial Network.