What is generational wealth? That’s wealth that lasts and benefits others beyond your lifetime. 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.
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.
Trusts allow you to direct the use and timing of funds, giving you more control of resources after you’re gone.
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.
Trusts can help keep your family’s assets private, so there’s less information available in public records.
Certain trusts may also offer tax benefits such as the ability to defer or lower taxes.
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.
The initial expense of setting up a trust can be costly. Then, you will have annual costs to manage the trust properly.
The trust must be administered correctly to maintain benefits, but this can sometimes be confusing and complex.
Many types of trusts are permanent and can’t be changed even if you change your mind.
To gain the benefits of the trust, assets need to be put into them correctly. That means titling or deeding all assets properly.
You transfer ownership over to the trust, so you technically no longer own those assets.
Future law changes may impact a trust, which may change the benefits your family receives in the future.
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.
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.
EstateExec.com 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.
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.
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.
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”).