4 Tips on How to Manage Generational Wealth

4 Tips on How to Manage Generational Wealth

Have you ever wondered how the “old money” families were able to stay so wealthy and successful? What strategies did they use to ensure financial stability for so many generations? The answer is telling: they focused on building and preserving generational wealth. Why is generational wealth important, what are its challenges and how can you successfully preserve it?

Once you build generational wealth, it’s time to learn how it can be managed and used to your and your family’s advantage. 

To ensure that your hard-earned financial assets are utilized in accordance with your preferences and kept out of the hands of the tax collector and other threats, there is significant planning required, preferably aided by the right financial professionals and advisors.

Why Is It Difficult To Keep Wealth For Multiple Generations?

A famous observation is that “many families have gone from shirtsleeves to shirtsleeves in three generations.”. Studies show that 90% of very wealthy families lose their money by the third generation, and families will inevitably face challenges with succession and cross-generational wealth transition. These challenges must be recognized and planned for in order to be overcome.

Too frequently, a lack of trust, openness, and dialogue between the elder family members and their heirs causes family wealth to diminish. This can also happen as the result of the difficulty in transmitting values around money along with money down to subsequent generations.  The underlying obstacle is that the following generation is often unqualified or underprepared to take over the responsibility for managing the family’s financial assets or leading the family business into the future.

Furthermore, as wealth passes down through generations, preserving and perpetuating the financial legacy becomes more and more challenging. The fragmentation resulting from the financial assets being divided across a wide variety of heirs across multiple geographies is one concern.

The family wealth initiators, often those who built the family business and fortune in the first place, might also choose to engage in very low-risk investments or take unneeded risks, only to discover that inflation is eroding their money. Poor tax planning can play a big role in why many wealthy families have seen their wealth decline over time.

This Is How You Successfully Manage Generational Wealth

Passing down wealth from one generation to another and maintaining a financial legacy is harder than it seems, as we’ve already established. However, setting up your family’s financial future for generations to come is entirely possible.

Here are 4 tips to help you build generational wealth and maintain it in the long run:

1. Family Transparency is Key

You cannot have a multigenerational plan if you believe that every family member already understands what you do and will pick it up on their own. Despite having an excellent education or fulfilling work, your children may not be aware of the family’s financial position or generational plans.

It is the giver’s duty to provide the family with direction and leadership and preparation so that they will know what to do in the event of your passing. It is crucial to have a well-written will and set up the proper structures in advance.  Preplanning that considers the various tax laws and legal systems in the jurisdictions where assets are located. 

2. Document Each Step You Take

Legal structures can serve as a guide for implementing aspects of the generational wealth plan, but in reality, many of the steps will be established after your passing by the heirs to your estate. Therefore, it is crucial that they not only comprehend your objectives but also that they are documented in writing or perhaps in media so that they can be passed on and shared with succeeding generations.

The objective should be to establish clear guidelines for how the family money is to be used and safeguarded, thereby establishing limitations on how money is accessible and how money is to be invested in order to preserve and grow generational wealth.

People who have never built riches for themselves often do not have the same understanding of money and wealth creation. . The ultimate goal is to give your successors the resources they need to further their education, increase their income, take further the family business or launch an entirely new one in order to develop wealth for themselves and learn what it takes to not just make money, but also to secure and grow it.

3. Do Your Research On Trusts and Use When Appropriate

Trusts can be a useful instrument for safeguarding your money and ensuring that the majority of it is transferred to the following generation, assuring their financial future.

A trust is a fiduciary arrangement in which the grantor, or first party, sets up and funds a trust and grants a designated person, the trustee, power to manage the assets in the trust which can be both real properties and financial assets for the financial advantage of the beneficiaries. 

Families utilize trusts for a variety of purposes – some of the advantages they bring to the preservation of generational wealth are: 

  • Avoiding inheritance taxes
  • Avoiding probate court
  • Protecting assets from creditors
  • Leaving a philanthropic legacy.

4. Emphasize Proper Risk Management

One of the keys to maintaining generational wealth for a family is to have proper risk management structures and procedures that help the family preserve wealth in the long term.  One of the most significant values that advisors can add is the experience they have to know where the most common sources of risk are and how to structure around them or avoid them.

Risk management is a multifaceted topic with many aspects.  One of these is insurance – which can be life insurance, property insurance, liability insurance, business interruption insurance, health insurance, and even umbrella insurance. 

For wealthy families, life insurance is sometimes used not to create an instant estate in the case of untimely death but rather to pay estate taxes more tax efficiently

For precisely this reason, irrevocable life insurance trusts (ILITs) are frequently used by wealthier families. A life insurance policy’s death benefit will be counted toward your gross estate if you are both the owner and insured. On the other hand, the death benefit money is not included in the insured’s gross estate when the insurance policy is held by an ILIT and is therefore exempt from state and federal estate taxes.  The use of ILITs is one of many smart tax strategies that wealthier families can use as part of a broader risk management strategy.

The Support You Need in Building Generational Wealth 

Learning how to build generational wealth and preserve it goes well beyond these 4 tips. They are some of the key fundamentals, but planning for your financial future can and should be backed up by the vast knowledge of a great investment advisor who is also a savvy financial optimizer.
Ridgewood Investments is dedicated to providing the education and strategies necessary for the long-term financial success of its customers. Contact us and let’s ensure together that your wealth meets many generations to come.

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