By Kyle Hafstad, CFP®, Estate Planning Advisor
Managing and growing wealth across generations requires thoughtful planning. It is often, and understandably, framed around allocating dollars and cents and financial inheritance. Yet, there is a growing focus on the "softer issues,” including family values and charitable giving. This approach goes beyond setting aside assets for future spending, focusing instead on instilling a thoughtful perspective on money's role and purpose across generations, reflective of the family's core values.
Below, we provide a crash course on multigenerational wealth management, addressing common strategies, challenges and important considerations. It is recommended to consult with your financial and tax advisors to determine plans appropriate for you and your individual circumstances.
Strategies
First and foremost, our planning strategies are grounded in careful financial analysis, ensuring we don't over-allocate to future generations at the expense of those who originally amassed the wealth. It's crucial to avoid over-gifting so the current generation can still enjoy their wealth while simultaneously planning for the future.
There are two key types of effective estate planning: annual exclusion gifting, a yearly opportunity capped at $18,000 per recipient in 2024, and lifetime exemption gifting, which can be used at any point during life or at death.1 While annual gifts offer a straightforward way to transfer wealth, their "use-it-or-lose-it" nature encourages timely action. To ensure these gifts genuinely benefit the recipient while providing flexibility, setting up trusts can offer a way for controlled distribution over time.
Irrevocable dynasty trusts also stand out for their ability to recognize and support heirs across several generations through leveraged gifts and use of lifetime gift exemptions.2 When contributing to these trusts, the donor’s basis in a gifted asset carries over to the trust. This makes high basis assets, like cash, the most beneficial assets to transfer into the trust – preserving some future long-term capital gains taxes in addition to the future estate taxes saved. in order to preserve.
Common Challenges
The biggest challenge in wealth transfer is the donor’s apprehension about losing access to their gifted assets. In order to realize estate tax savings or income tax advantages for beneficiaries, donors must make this leap. This process involves a delicate balance, ensuring clients understand the financial strategy behind the asset shift not as a loss, but as proactive planning for their and their beneficiaries’ futures. The goal is to find a comfortable middle ground where the benefits of tax savings outweigh the perceived loss of control and access.
The second hurdle involves clients' concerns over the potential impact of substantial wealth on their beneficiaries' lifestyle. To address this, trust provisions have specific language to guide the distribution of assets, ensuring they aid beneficiaries' health, education, maintenance and support (HEMS) without encouraging dependency. The HEMS standard3 helps maintain a sense of normalcy and responsibility, ensuring wealth serves as a tool for support and growth, versus funding personal indulgences. To illustrate, I often share that if a beneficiary was driving a modest car before the trust's establishment, the trust benefits would not suddenly elevate their standard to a Ferrari.
Important Considerations
Tax laws are inherently temporary and subject to change, which often leads to hesitation among clients wary of future reforms. However, implementing strategies now based on current tax laws can secure advantages that remain in place in the event that tax law or code changes. Starting early with gifting strategies, similar to investing, allows for the compounding of benefits over time. Given the potential for a sunset in tax law by 2026,4 we encourage clients to seize the current opportunities that can offer substantial long-term benefits.
A final, often overlooked point is including beneficiaries in wealth management conversations early. Transparent discussions with the family and their advisor help instill a sense of responsibility and understanding of wealth's purpose according to the creators' wishes.
Effective multigenerational wealth management merges strategic financial planning with the nurturing of family values and philanthropy, ensuring that wealth not only grows but does so in a way that honors the family wishes for years to come.
Contact your Exencial advisor if you wish to begin conversations about multigenerational wealth management.
Exencial Wealth Advisors is an SEC registered investment adviser. Any references to the terms “registered investment adviser” or “registered,” do not imply that Exencial or any person associated with Exencial has achieved a certain level of skill or training.
Sources:
- Kiplinger (3/11/24) – Wealth transfer and strategic gifting opportunities for 2024
- Investopedia (10/21/22) – Dynasty trust: Definition, purposes, how it works, and tax rules
- SmartAsset (4/20/23) – What is the HEMS Standard in estate planning? Definition and examples
- The Tax Advisor (12/1/23) – Tax planning for the TCJA’s sunset
