You’ve probably heard the saying, “From shirtsleeves to shirtsleeves in three generations.” The old adage is a pithy commentary on how difficult it is to pass wealth from one generation to the next.
“The first generation makes the money, the second generation ‘caretakes’ it and the third generation spends it,” says Patrick Renn, founder and president of The Renn Wealth Management Group and author of “Finding Your Money’s Greater Purpose: How to Make Your Legacy Count.”
Transferring wealth may indeed be more difficult than amassing it in the first place. But, if you’ve worked hard to create wealth for your family, you no doubt want to leave a lasting legacy. Sure, you can use tools like trusts and gifting to distribute funds to children and grandchildren and to manage the tax ramifications. Still, how can you help your heirs avoid the “shirtsleeves-to-shirtsleeves” risk?
The key, Renn says, is to pass on not only your assets, but also your values. He advises bringing future generations into “the family wealth enterprise” and training them to meet their responsibilities.
“Training of family members may involve family meetings, charitable service and investment decision input,” Renn says.
Money is a taboo topic in many families. However, talking to your children and grandchildren about how you built a successful business or your investment strategy may do more to preserve your wealth than any tax loophole or the best stock tip.
Here are a few strategies for wealth preservation that you may want to discuss with your financial advisor:
1. Reduce value of the estate through strategic gifting. Myriam Mourani, a tax professional who works with many affluent families, reminds us that parents can currently transfer $14,000 annually to children without triggering a gift tax.
2. Put assets in trust funds. Mourani says you can minimize your legal exposure by moving assets to living trusts. Laws related to trusts can vary by state, so be sure to consult an estate or trust attorney in your family’s state of residency.
3. Put real estate investments in land trusts. Sacha Ferrandi, founder of Source Capital Funding, Inc., says a land trust is essentially when a private group (trustee) acquires land on half of the owners (beneficiary). While the beneficiary controls the management of the property, he or she doesn’t have to worry about the details of buying, selling or owning real estate. Ferrandi says land trusts offer several benefits for families that want to preserve wealth. “These include privacy, owner protection from certain real estate legal issues, succession of ownership after death through easier probate proceedings, ease of selling property, and more,” Ferrandi says. “Especially for families with many children, setting up land trusts is a fantastic option to secure wealth for the long term.”
4. Combine limited liability companies with a charitable entity. Retirement planning specialist Scott Thompson says this strategy is being popularized by ultra-wealthy people like Facebook founder Mark Zuckerberg, eBay founder Pierre Omidyar and Steve Jobs’ widow, Laurene Jobs. But, Thompson says it can work for any philanthropy-minded person with more than $500,000 in taxable income, appreciated real estate and stocks, or for people who are selling a business. Here’s how it works: You establish an LLC and contribute assets to it. As the manager, you can invest the LLC’s assets however you like, but you must donate a percentage of the investment income to charity. “And like other charitable entity, there are ways to create a tax-free stream of income for the managers of the LLC,” Thompson says. “So you and your family may be able to take tax-free income for the rest of your lives.”
Best practices for wealth preservation can be impacted by changing legislation, so you should touch base with tax and investment advisors on a regular basis to make sure you’re still on the right track. New York-based wealth manager Garrett Hurley says to keep an eye on proposed regulations under IRS code 2704 that would limit the ability to utilize discounting in closely held family businesses, a common strategy used to minimize the impact of annual gifts.
“[Donald] Trump has also previously proposed eliminating the federal estate tax, but it would likely be replaced by an elimination of the step-up in basis received on capital gains assets at death, affecting many of America’s most successful families owning highly appreciated property,” Hurley says. “It is critical to pay attention to any upcoming changes from the new administration and review and adapt your planning accordingly.”
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