Tip of the Iceberg: Wealth Transfer Tools for Setting Future Generations up for Financial Success

Nov 29, 2017

How can you provide your children, and their children, with financial stability now or when you’re no longer here? What wealth transfer strategies are best for your family? Unfortunately, we can’t give you all the answers in the context of one blog post. But we can get you started. 

As you likely already know, the transfer of wealth from one generation to another is a delicate process. Emotions can run high when making wealth transfer plans and/or discussing financial information with family members. Homer Carrillo and Amy Sbrusch recommend the following tools to begin the process of setting future generations up for financial success.

Determine what your children’s needs (or their children) are or will be in the future.

Besides thinking about the lifestyles of your children and how you’d like for them to be supported financially, it’s also important to consider more critical needs. For instance, if you are the caregiver for a special needs child or a parent, you’ll want to develop special plans to ensure they are taken care of in your absence.

Likewise, do you have a family business that needs to be considered? If so, who will run the family business moving forward? Will it be your children or grandchildren or will your business need to be sold?

Develop a plan of action with your advisor.

Communication with your advisor is an important first step in a much longer process. During an initial meeting, you should be discussing what your estate looks like, identify your various assets, discuss your family members’ individual needs and then determine the best options based on your current assets and future needs.

Your advisor will discuss some of the following wealth transfer options and the associated estate tax responsibilities with you to determine which combination makes the most sense for your family.

• Educating the next generation – While not a formal wealth transfer tactic that you’ll hear or read about often, education is vital. Sharing your financial values, as well as instilling a sense of personal responsibility with future generations is important in setting them up for success. It’s especially important when they are likely to be the recipients of significant wealth - either now or in the future.

• Direct gifts – With the ability to give up to $14,000 annually to any individual, direct gifts provide families with the opportunity to pass assets along without the burden of paying taxes. Because of this, direct gifting is a good tactic to remove these dollars from your estate. The details of any gifting process can be very straightforward or complex.

• Family limited partnerships – Another common method of transferring money out of an estate, a family limited partnership is a fantastic option for family businesses. Typically, in these situations the partners in the partnership are children or grandchildren who serve as partners in managing business interests, real estate investments, securities and more. Although these entities can yield proper estate planning, a legitimate business purpose is a requirement for proper structuring.

• Trusts – Trusts are a fantastic option for families that would like to set aside money for future generations, but don’t want them to have access until a certain point in life. For instance, many parents want their kids to make it through college, get degrees and start making it on their own before they have access to family money. A drawback of the trust is that it is usually taxed on any income accumulated.

• Generation skipping gifts – A subset of trusts, generation skipping gifts enable family members to share assets with family members. In this case, however, generation skipping gifts typically go the children with the intention that they’ll ultimately be preserved for the next generation, grandchildren or great grandchildren. The benefit here is that you are not only moving these assets out of your estate, but out of your children’s estates, as well.

There can be other very beneficial reasons to set up trusts, in addition to transferring wealth.

What are your assets?

Once each of these options have been considered, it’s time to decide which option (or combination) is the right one for you and your family. Questions your advisor will likely ask you:

“What are your future needs?”

“What do you want the future to look like for your children and/or what are their needs?”

“Will you want to sell your business in the future or pass it down to children?”

“Which tax results and estate tactics are more in line with your estate planning goals – a family partnership or a trust?  

“Which of these assets will continue to grow?”

Consider how much information to share with your loved ones.

It’s important to figure out how much information and when to share with your family. Furthermore, it’s important to know your children and how best to approach them about these sensitive issues. “If it’s going to be highly emotional, you may want to include a third party (your advisor), so they can help keep things in perspective and explain the reasoning behind decisions,” Homer recommends.  

A sound strategy typically follows this type of pattern: Meet with your advisors first to develop an overall plan. Follow this meeting with a family meeting to discuss what has already been accomplished, while also hearing about and discussing how other family members feel about the proposed plan. This is where educating future generations is especially important.

Never stop planning or communicating with your advisor.

Because it’s impossible to know what the tax laws are going to be moving forward, it’s important to stay on top of legislative changes and in touch with your advisor. This will put you and your family in the best position to ensure that your assets are properly transferred and preserved for your family or other recipients.

Every family is dynamic and has different needs. When developing your wealth transfer strategy, it’s important to consider some of the ideas listed above, but to recognize that this is merely the tip of the iceberg. The wealth transfer process is not a one-time occurrence, but rather a lifetime priority you will need to engage with and revisit time and time again.