Do your personal goals include leaving a financial legacy for future generations? Multigenerational financial planning is an essential strategy to transfer the wealth you’ve accumulated to the next generation.
At our financial planning firm, we often work with multiple generations within a family. In addition to developing financial plans for individual family members, we discuss proactive strategies to manage and transfer wealth across generations, either through gifting during your lifetime or leaving an inheritance after death.
This type of planning is about more than accumulating assets; it also focuses on preserving and growing wealth, minimizing taxes and ensuring that the financial goals of both current and future generations are met.
Assess Your Family’s Needs
It is essential to understand each family member's financial situation, resources and goals. Depending on individual ages and stage of life, personal goals can include plans for retirement, education, purchasing property, philanthropy or starting a business.
Knowing where each family member is in their financial journey and what they hope to achieve for their family is a fundamental step in developing a multigenerational financial plan.
Optimize Tax Efficiencies
An effective multigenerational plan includes strategies that reduce tax liabilities, both during the lifetime of the asset holder and upon transfer to the next generation. This approach requires an understanding of each generation’s current and projected tax status.
For Example: If the older generation (G1) has qualified assets, like an IRA or 401k, and if all these items are true:
- G1 is in a lower tax bracket
- G1 doesn’t need the money to support their own financial goals
- The next generation (G2) has a higher tax bracket than G1
It may make sense for G1 to take an annual distribution and hold the money in a non-qualified account so that the taxes will have been mostly paid at a lower tax rate when the next generation inherits the assets.
Review Your Estate Plan
Each generation needs to have up-to-date estate documents in place.
Create an estate plan that includes wills, trusts and powers of attorney. This ensures that your assets are distributed according to your wishes while minimizing estate taxes.
For Example: If any family members live in Minnesota and their estate exceeds $3,000,000, it is important to design an estate plan that minimizes the potential estate taxes imposed by Minnesota. For a couple, if the estate plan is done properly, you can avoid taxes on up to $3,000,000 each, for a total exemption of $6,000,000. That can be a tax savings of up to $450,000 (based on 15% of $3,000,000).
Apply a Diversified Investment Strategy
A diversified investment strategy balances risk and reward, aligning with each generation's financial goals and time horizons.
Investments can be structured so that the target asset allocation will be based on who will likely use the investments.
For Example: If G1 has a Roth IRA that they do not need for their own financial needs and the plan is to pass those assets to G2, G1 may decide to invest the Roth IRA more aggressively than they would invest their own portfolio, targeting something more in line with G2’s asset allocation targets. (Typically, the longer your life expectancy, the more aggressive your portfolio). The beauty of a Roth IRA is the tax-free growth that can pass to the next generation and remain invested for G2/G3 up to 10 years after the passing of G1.
Maintain Adequate Insurance Coverage
Review your insurance policies annually to ensure you have adequate coverage to protect against unexpected events. Your planning might include life insurance, health insurance, disability insurance and long-term care insurance. Consider your current and future needs, any changes in your circumstances and factors like inflation.
Insurance planning for families is always a good idea and may be another planning tool to consider in multigenerational planning.
For Example: If G1’s estate exceeds $3,000,000 it is important to consider the tax obligations for the next generation and to evaluate what resources are available to pay those taxes. One option is to purchase an insurance policy that pays out when the 2nd G1 member passes. This type of policy, called 2nd to die, is typically less expensive than life insurance policies based on one life. If G1 pays the premium on the policy, the proceeds from the policy can be used to cover tax obligations, making this an attractive strategy to maximize the transfer of assets to future generations.
Include Philanthropic Giving
Many of our clients want to leave a philanthropic legacy that expresses their values and makes an impact. Charitable giving is a significant priority for their estate plans because it offers the opportunity to support the causes, organizations and ideas that matter most to them. For many families, charitable giving also provides other estate planning benefits, including different ways to reduce taxes for you and your heirs.
If charitable giving is important to you, talk with your family about your philanthropic approach and incorporate it into your financial plan. There are multiple ways to give, and some of these bring tax advantages now. Options include setting up foundations, contributing to donor-advised funds and making direct contributions to charities.
For Example: Some charitable giving tools allow you to gift during your lifetime, leverage the tax deductibility of the gift now and distribute the money to charities in the future. One of these tools is a Donor Advised Fund (DAF). There are many DAF platforms available. Schwab has a Donor Advised Fund that we typically use for our clients. There are other more complex ways to give, and many can be very helpful in maximizing your gifts.
Whenever multiple generations come together to plan for their families, it is an opportunity to educate family members about financial principles, the importance of maintaining the financial plan and how the plan is designed to benefit today’s generations as well as future generations. Including family members in open discussions about your own multigenerational financial plan can be helpful in understanding each person’s needs and goals, avoiding misunderstandings and reducing potential conflicts.
All financial plans require regular reviews and must be adjusted for changes. Regularly engaging with your financial advisor, estate attorney and tax professional will help ensure that your plan is comprehensive and effective. The earlier you start planning, the more options you will have to grow and preserve your family’s wealth.
