How To Maintain Your Family’s Generational Wealth

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Cynthia Measom

Thu, Jan 27, 2022, 9:00 AM 4 min read

Generational wealth is defined as assets — cash, stocks, real estate and businesses — that are passed down from one generation to the next. Unfortunately, this type of wealth can be rather elusive.

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“According to numerous studies, 90% of family wealth is lost by the third generation,” said Howard Lutz, senior vice president at Intercontinental Wealth Adv i sors. “While statistically accurate, this concept is more complex than initially meets the eye. With the creation of the wealth in the first generation often resulting from ceaseless drive, unrelenting work ethic, and the sheer tenacity to be successful, a fairly common byproduct of this intense focus is that success, and more specifically, the resulting wealth does not get the attention it deserves. The second generation quickly figures out how to spend the newly created wealth, and then by the third generation, the wealth is often lost.”

Instead of becoming part of the dismal statistic, here’s the expert advice you need to help you maintain your family’s generational wealth.

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Talk About Money With Your Heirs

“We have worked with many families over multiple generations,” said Mitchell Kraus, CFP(r), CAP and founder and wealth manager of Capital Intelligence. “We’ve seen some families make the same financial mistakes generation after generation because the older generations never teach their children about money and the mistakes they’ve made. In addition, when families do not talk about money, they cannot optimize what they have.”

Courtney M. Weber, a wealth advisor with Truepoint Wealth Counsel, offered these suggestions.

“Communication is critical when families want to maintain generational wealth,” Weber said. “It can be helpful to conduct regular family meetings with all adult family members present (in person or via Zoom). During those meetings, the family can cover the history of the wealth creation, the family’s enduring values, and the actions the family has taken over time to steward their assets. Subsequent meetings can then cover any current issues facing the family as well as the family’s future intentions for their wealth. These meetings allow for the next generation to ask questions and learn from previous generations.”

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Hire Advisors

Financial planning is a core element in maintaining generational wealth.

“If you look behind the curtain in families of generational wealth, you will usually find a cadre of advisors — a private client group, investment house, or other financial services group — who help guide the family over the long time horizon and a combination of investments and risk management products that help to realize the family’s very long term vision,” said Paul LaPiana, CFP, head of product with MassMutual.

But not just any finance professional will do.

“You need to hire competent professionals who have a full understanding of generational wealth preservation strategies,” said finance professional Andrew Lokenauth.

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Understand (or Hire Someone Who Understands) Taxes

“To build intergenerational wealth, you need to understand taxes, both income and estate,” Kraus said. “It isn’t about what you make but what you keep after taxes. Too many families are all about return and do not look at where those returns are going to be taxed the least. Some examples are gifting income-producing assets to children who might be in a lower tax bracket, converting retirement plans to Roth IRAs to reduce estate taxes and the income tax children might pay, or gifting minority interest in real estate or a business to reduce the gift tax burden.”

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Educate the Next Generation

“Wealth vanishes after a few generations because the young forget, or never learn, the disciplines that it originated from,” said Nick Bormann, CFP(r), financial planner at Bormann Wealth Management LLC. “Educating the next generation about saving and building wealth themselves can help them avoid the temptation to squander what they inherit. They shouldn’t be taught to plan around the money they’ll eventually receive; for one, because the future is always uncertain, and for two, because it may cause them to neglect their own career and skills or develop bad money habits.”

Brian Colvert, CFP(r) and CEO of Bonfire Financial, agrees.

“The best way to protect generational wealth is by laying a solid foundation of financial literacy and investment education,” Colvert said. “While financial planning and investment strategies are important, making sure future generations have the knowledge to make wise financial decisions is, I would argue, more important.”

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Set Up Trusts

“Working with an estate planning attorney to draft up trusts that can specify when and under what conditions heirs receive money can help instill a sense of control and preparation in the family, as well as create contingency plans if tragedy strikes,” said Gary Grewal, CFP and author of Financial Fives.

Bormann agrees that trusts are essential in preserving a family’s generational wealth.

“Thoughtful use of trusts to pass along inherited wealth can make a big difference,” Bormann said. “The rules for trusts will vary by jurisdiction, but setting up a structure where a young person can learn some about money, or receive some benefits and support, while still getting guidance from a trustee and not having access to spend all the principal at once can help.”

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