Wealth Transfer for Multi-Generational Families
By: Brian Seay, CFA
“What happens to my family when I’m gone?” You have probably asked yourself this question already. Perhaps you met with an attorney or started “estate planning”. However, multi-generational wealth planning is not about your passing. It’s not primarily about taxes. Effective wealth transfer is about ensuring that your legacy positively impacts your family and the community for many generations. Typical estate planning may help avoid taxes and manage risk, but it will not create a meaningful impact on your children and their children. On the other hand, a strategy for transferring wealth will empower your family well beyond your lifetime. In this article (and recent podcast episode) we discuss strategies to create meaningful impact for generations as you transfer wealth.
The first step in transferring wealth is engaging and training your children and grandchildren. Part II of our discussion on generational wealth covers this in detail. So start there if you have not read (or listened). This step is vital, so please don’t skip this as you consider wealth transfer.
Start Wealth Transfer Now:
When your kids are young, give them assets and a budget instead of funding all of their choices and expenses. Force them to make hard decisions that build character. They won’t always make good decisions, but they will learn from their mistakes and make smarter decisions as they inherit more assets down the road.
We recommend starting this process prior to college planning, but college planning is a unique opportunity for learning if you have not started working with your kids before. Start with funding a 529 College Savings Plan. Then share the details about the assets you have saved for college with your kids. Allow them to make decisions about where to go and what budget makes sense for their aspirations. They should decide how to use the 529 assets plus scholarships and their own hard work to support their college plan. New rules allow your children to roll some unused 529 funds into a ROTH IRA. You may find that your children choose to spend less on school to have a bigger initial nest-egg down the road. This approach for college planning provides a great decision-making sandbox with real incentives. If you are thinking multi-generationally, you can even overfund 529 plans and pay for many generations of educational expenses because distributions are never required. Just remember to give each student a budget!
Estate Planning is a Journey, Not an “Event”
Effective wealth transfer that mitigates estate tax liability requires planning over many years, even decades. Training becomes critical because good estate planning will begin transferring significant assets to your children in their 30s, 40s and 50s, long before you are gone. Annual exclusion gifts allow a married couple to give $34,000 to each child and grandchild every year. Over time, that can turn into hundreds of thousands or even millions of dollars of gifts. Legal entities like trusts and family partnerships are often used to mitigate estate taxes. They are as diverse as the number of families using them. Thus we are not covering every estate tax mitigation strategy here, but many trusts, family partnerships and gifting strategies work best over many years. If you are training and engaging your family, they will be ready. Most importantly, they will see new assets in their name as simply a continuation of the family’s assets, not “your assets” vs. “their assets.”
Reduce Estate Taxes
Reducing estate taxes is often a goal for families with significant assets. The right strategy for your family is unique to your family. However, there are two pieces of the puzzle that we see commonly:
In our view, one of the only useful applications for whole life insurance or universal life insurance is for estate planning. If properly structured, life insurance is not included in your taxable estate and therefore not subject to tax. You may be able to pay premiums over time from your taxable assets in exchange for a tax-free payout at the end of your life.
The second strategy is known as a “step-up in cost basis.” When you sell an asset that has increased in value during your life, you pay capital gains tax on the profits. This applies to assets like your family business, real estate and publicly traded stocks. Those taxes can be up to 20% of the gain. However, when you pass away, your heirs receive those assets at the current market value, as if they bought them that day. The next generation of owners can then sell the asset with little to no capital gains tax. Waiting to sell assets like family business shares, real estate, or even stock is a great way to avoid significant capital gains taxes.
Charitable Foundations for Every Family
You don’t need to be the Fords or Rockefellers to have a family foundation. Donor advised funds are a great option for charitable assets when your asset level doesn’t justify the administrative overhead of a family foundation. Donor Advised Funds, also called Community Foundations, are “sub-funds” within a larger community non-profit. The larger, established foundation manages the administration for all the sub-funds at a lower cost than would otherwise be possible. Donor Advised Funds provide the tax benefits and control of a private foundation, without all of the overhead. They may also help vet potential non-profit partners and provide other resources to your family. You can often start your own fund with a few thousand dollars.
Multi-generational investing
Most investment and financial advice is targeted at individuals saving for their own retirement. Retirement savers take risk early and then reduce risk as they age. Your assets aren’t simply to support your retirement lifestyle, they are intended to support your family over 50 or even 100 years. If this is the case, your investment strategy is closer to that of an endowment than a normal retirement saver. That likely means you should own more business equity and stocks and fewer bonds over the long-term. Your business and investing strategy should match your multi-generational wealth transfer goals.
transcript:
And this last episode of our series on generational wealth, we're going to talk about estate planning and wealth transfer. The big unlock here for most people is that they think of estate planning. As a thing I do, where I go sit down with an attorney, I make some documents. We try to avoid taxes. And then we're done. State planning is not really that it's really a journey and it starts, and it builds over time. And it's not just about taxes. It's about effectively moving your assets. From your ownership into the ownership of your kids and your grandkids. In that way, estate planning is really about building the financial foundation for the future of your family. So it should be way more exciting than anything that involves going down and sitting. I'm in an attorney's office and doing documents And so that's actually what we're going to talk about in this episode as well, transfer and estate planning and wills and drafting documents and things like that. All right. Part a small part of that
Hey everybody. Welcome back to the Capital Stewards podcast. Today we're in episode three of a three episode series about building multi-generational wealth, and we're excited to be back to talk about transferring wealth for generational impact. You heard in the opener, Brian talk about estate planning and the idea that that.
You know, people think about that as a one time moment with an attorney
Death and taxes
Oh gosh. Such a, an inspiring subject way to get listeners, right? Yes. So you've probably thought about estate planning as. What happens to your assets and resources after you're gone? But multi-generational wealth planning is about like building a legacy, not just about when you die.
So let's go ahead and dive into the subject, Brian. Where, where should we start?
So the first step in transferring wealth, right? Because that's what we're actually trying to accomplish as wealth transfer, not simply estate planning or moving assets around. The first step is actually to engage in training your children and your grandchildren. So in the last episode, we talked a lot about managing wealth training of the next generation of folks and how to. Effectively build the next generation of wealth stewards for your family. So that's actually the very first place you want to start. Engage them in family business decisions, engage them in, working on charitable causes, have them meet with your advisors, have them meet with your investment folks, your estate planning, attorney, CPAs, all that kind of stuff.
And so that step one. So if you haven't listened to that episode, check it out. It's the last episode, I think, in the, in the podcast feed. We talked about it in much more detail on a lot of how to things in there. So start there.
So we're gonna start young.
Yeah. So the first step. When we actually start thinking about wealth transfer is to start young and kind of dovetailing on what we talked about. In the last episode, we want to start actually giving our kids assets that they control when they're younger. When your kids are young, give them assets in a budget instead of a blank check to cover all their needs. It makes them make hard decisions that build character over time. They won't always make good decisions. But they'll learn from their mistakes and they'll make smarter decisions as they inherit more assets and more responsibility down the road. I actually think starting prior to college and prior to college planning is a good idea. You can do that with allowances buying their own stuff, even in middle school and high school. Right. Make them get a summer job. They can work for you. They can work in the family business in some way. But they can also work somewhere else in the community. Right. And all of those kinds of things are good ways for them to start earning money, managing money. Living on a budget all that kind of stuff, but if you haven't started already, I think planning for college. Is a really good opportunity. To start this process. It's also conveniently a really good wealth transfer opportunity. You can start funding the 5 29 college savings plan for them. And let them use those assets. And the scholarships that they earn and their hard work to pay for college, instead of just writing a check. To cover tuition and all their living expenses every year.
5 29 plans can now be turned into a Roth IRAs. And there's some limits in some complexity around that, but it sort of eliminates this issue we had in the past where we had to sort of underfund the 5 29 plan because we didn't want there to be any money left over in there. Now we put money in a 5 29 plan and we ended up not using it. It can move into a Roth down the road, which is a great asset for your kids. To inherit. So you can start with a 5 29 plan, and then you were funding the 5 29 plan. It grows over time. And then when your kids get to college, They decide where they're going to go to school and how they're going to spend the money that's in there and how they're going to deal with scholarships and their income and expenses and all those things. And this creates a really great sandbox. There's real incentives in there. There's a lot of real life. Hard decision making that has to happen there. And so it's a great place for your kids to start making really significant decisions. And if you're really starting to think multi-generationally, you can overfund 5 29 plans and create sort of a family legacy 5 29 plan. That'll pay for many, many generations of educational expenses because you can just keep rolling the beneficiaries forward. Move money into Ross and things like that. So, There's a nice tax play there too. But again, I think primarily. The focus should be using this as an opportunity to put money aside, give our kids a budget and then have them make decisions about how they're going to invest for their own education and how they're going to spend their own educational dollars when when the time comes for them to go to college.
So they, it's a really great place to start. If you haven't already started training your kids.
That's really cool. I didn't realize you could do that with a 5 29. So, so much of this episode thus far, Brian, and, and then the prior episode two was about, you know, not just treating almost as a, this is like a one-time transfer of wealth, but more of an ongoing approach to education. Mm-hmm. Around, you know, Building assets and multi-generational wealth and that being a journey and a process of education.
We started off the episode is saying that estate planning is very similar to that. So talk to us about that comparison. Like, why is estate planning like a, a journey and not just like a one-time event?
So effective wealth transfer that's designed to truly mitigate a state tax liability. If you've got generally, I think about it as you've got more than 10 or $12 million, then that's something you should start thinking about. Your state's probably not taxable until you get north of $20 million. But. Depending on how a state tax laws evolve and tax rates and things like that. And you should probably start having some of those conversations. You know, w when you're kind of in that double digit range so if you've got a potential estate tax challenge, it requires planning over many years and the training becomes really important because good estate planning is going to start to transfer significant assets to your kids in their twenties and their thirties and their forties and their fifties probably long before you're gone. And they're going to have assets. They're going to have to manage those in their name. Annual exclusion gifts are one way that we start doing that a lot that allows a married couple to give $34,000 now to each child and grandchild every year. I mean, over time, you can just imagine that can turn into hundreds of thousands of dollars, even millions of dollars of tax free gifts from an estate planning perspective.
And so. On this episode, we're not going to talk about every single tax mitigation strategy that's here because there is many tax mitigation strategies, sor situations out there. But when you're thinking about creating trust or family partnerships or gifting strategies, all of those things work best over many, many years, because there are limits to what you can do in any one year. So. It's really important that you're training and engaging your family over time so that they'll be ready when it makes sense to start to lean into those kinds of strategies to transfer wealth to the next generation
You know, one of the things that I hear about for families that are passing down wealth to their kids is almost a sense of like, control. Mm-hmm. And trying to dictate how assets will be used mm-hmm. In the future. Sometimes it seems like that comes in different forms. There's things like foundations and trusts. Talk to us a little bit about like kind of what maybe some of those structures might be and you know, why someone might want to consider
Sure. So oftentimes when we start talking about wealth transfer, we start talking about trust and legal entities and foundations and lots of complicated things, but all we're really doing, in its most basic form is simply moving assets from being owned by a person. So maybe being owned by you, mom and dad, or. Grandma and grandpa., to being owned by a legal entity that has a specific purpose that you, as a person, that's setting it up and funding it create. And why do people do that? Sometimes we're doing that for tax reasons. , there might be legal liability reasons. We might be trying to distribute family business assets across multiple people. And so we've got to put, illiquid assets into a structure that we can use. To pass out to different people. So there's lots of different reasons, and there are as many trusts and different sort of legal entities out there as there are people. But I think what's important., in, in the context of this conversation is just when we start thinking about trusts and estates and in sort of all of this complexity around that, just think about that as moving assets from being in your name, to being in the name of an entity that you control. That's set up for a specific purpose.
One of the things that boggles my mind about building multi-generational wealth is, you know, we're a couple, but we have three kids. Mm-hmm. And you know, I hope that one day they have their own kids and that those kids have kids.
And so how to manage this idea that like what you have will be amplified but also divided. Yeah. And I kind of also thought that was the point of some of these tools.
Absolutely. That can be the purpose of one of those tools you often hear about family partnerships. Those are used in those kinds of contexts. Think about where you built a family business or you've acquired a business and grew it, or perhaps you've got a real estate portfolio. It's hard to give one house or a piece of a family business or some property over here. Evenly to different kids or grandkids, and maybe you don't even want to do that, but it's just difficult to move those kinds of illiquid assets around. And so a lot of times those assets will go into a family partnership and then just like you would buy shares in a company. What you're actually giving out to family members is shares of a legal entity or a trust and that owns a business or real estate assets or even publicly traded securities can own a lots of different things so partnerships are one way that we sort of get around that problem of of having something that we can pass out to folks when we need to do that.
And maybe one form of entity that's worth talking about here is private foundations and charities. Those are entities that can be used to give money away. Right. So if you want to do something that is impactful in your community, if you want to give money. To your church. If you want to Sponsors sort of ongoing research around the world in particular areas charities and foundations can be a great tool to do that. We were talking earlier, I know you asked about the gates foundation and some of the things that you hear sort of in the, in the modern press about family foundations and that those are exactly it's exactly what those types of entities are.
Is there a ways for. Families to put money into charitable entities. Maybe you don't know exactly how you want to give the money away today. So you put it into a charitable entity today as part of an estate plan. It's part of a wealth transfer process and then your family members. Considering the board of that organization and can work on. Giving that money to charity over time, maybe in a way that's investing in, you know, things that are working on particular global issues or things like that. But one of the other things that we talked about earlier, though, that I think is important is you don't have to be bill gates or Warren buffet, or a Ford or a Rockefeller to have a family foundation and to have a charitable foundation. So that kind of concept is not just for Sort of super wealthy folks. And. In particular, one thing I think is worth bringing up here as a concept of a donor advised fund. Those are great options for charitable assets. Especially if, if the level of assets that you have, doesn't justify the administrative overhead of having your own huge family foundation. It's going to have a tax bill and illegal bill and attorneys and CPAs.
And so you're going to spend thousands of dollars every year. Just sort of maintaining your own. Charitable. A trust or a family foundation, but a donor advised funds sometimes there in your community. It might be called a community foundation. Julia sub fund within a larger nonprofit. And that that larger community foundation nonprofits essentially set up. So that they can manage all of that administrative overhead for folks that want to do charitable things in the community. And so you can just sort of put your money there. All of that administrivia stuff is taken care of. And more of your money can go to those specific causes in the local community that you care a lot about. And a lot of times it was foundations too, will offer. More services. So in addition to just providing. The sort of basic level tax and accounting and all that sort of stuff that they have to do, they may help you Yvette. Organizations that are looking for grants and they have their own network of of charities that they've worked with before so they can really be a powerful partner in helping you have a really big impact on your community
so. Ultimately the reason you said that you set up some of these tools, trusts, foundations, is about managing taxes and helping to maximize the number and sort of the quantity of dollars that you have going to the places that you want them to go.
Yeah, a hundred percent. Talk to us a little bit more about mitigating estate taxes.
Yes. Reducing a state taxes is often a goal for families that have significant assets, right? You want your money to go where you want it to go either into your community, philanthropic interests that you have or onto your kids so that they can do great things in the world. You don't want to pay more taxes than you.
Oh What I always say is we want to pay all the taxes we owe, but we want to, oh, is. Little tax as possible. So like I said earlier there's a lot of different strategies that we use to mitigate the state taxes. But I think there's two strategies that are unique in the estate situation that we see use commonly, whether you have tons and tons and tons of assets or whether you're you know, just over the, maybe just over the estate threshold. And so I think maybe these are the two things that are worth. Bringing up here. So the first is actually permanent or universal life insurance is actually one of the only situations that I think is actually a useful application for life insurance. You probably have been sold life insurance by somebody at some point. Most of that stuff in our view is I'm actually helpful. It's not a good investment. But life insurance, if it's structured properly in an estate tax situation, it's not included in your taxable estate and it's not subject to taxes. So you might be able to pay premiums over time from your taxable assets in exchange for a payout. To family members or other entities down the road.
And because that transfer is outside of your estate. It's not subject to estate taxes. So we don't sell life insurance, but it's worth asking your wealth advisor. If you have a taxable estate and how life insurance might be a tool that can help you minimize your. I say tax bill.
And are there any other strategies?.
And then the second strategy is known as a step up in cost basis. When you sell an asset, that's increased in value during your life. You pay capital gains taxes on the profits. So if I buy a house for $10 and I sell it for $20 I have a $10 gain. And so if the capital gains rate is 20% and I have a $10 gain, then I probably got to pay $2 in taxes. To the government.
$2 is going to the government. Okay.
And if you think about your assets, if you've owned those assets for a really long period of time, or in, particularly if you started a business and maybe grew that business successfully over a long period of time, Almost all of that current value might be capital gain. Your cost basis might be a dollar or $2 a share or a dollar or $2 on something that is now worth. Significantly more than that. And so you might be talking about something like a 15 or a 20% haircut off the total asset value. However, when you pass away, if you just send those assets on to your kids, they get to treat them as if they are worth their current market value. Their cost of acquiring those assets is today's prices. If they had bought them today on the open market. So they turned around and sold them. They have no capital gain.
So let's figure that out as a story. I buy a house for a dollar. Yes. That house is now worth a hundred dollars. That's right. My heirs, their acquisition price basically on that. Asset is a hundred dollars. That's right. So any capital gains that they would have to pay on that asset are off a hundred dollars base instead of a hundred or instead of a dollar
Yeah, that's right. And if you sold that asset, say a few years before you passed away, well you're gonna pay something like $19. Right? In capital gains
taxes. So it'd be better to pass the asset to them directly Exactly. And let them pay the capital gains. And is that what step up in basis means? Which is a phrase I've literally never heard before.
Yeah.
That's why we have these episodes. That's, that is what a step up in basis. The cost of basis. The tax basis is the.
You guys can't see Brian. He, he's acting like you can see him, but he's making little air quotes when he says that. Yeah. Say what, what are you basis?
Tax basis. Tax basis. There you go.
He has aiquotes when he says that.
So the point to take away here is that waiting to sell assets like family business shares, real estate, even stocks and bonds that are in your portfolio. When you're getting towards the end of your life is a great way to avoid , significant capital gains taxes. So just something to think about there. When we think about managing a state taxes again, there's lots of different strategies. There are lots of different things that we can. Use. In these situations, but I think two things that come up frequently are about using life insurance and then also waiting to get that step up in basis using air quotes and passing assets, as opposed to dollars on your kids.
So if I was a glamorous woman, you know, two or three times my age and not the glamorous woman that I am today, in my mid thirties. I had a big portfolio of real estate because I had been acquiring assets throughout my life. It would be better for me to. Kind of like continue to hold that real estate and pass to my kids that
what're saying
Yeah, it might be. So from a pure tax perspective, that will be true. There might be other considerations there. Diversification. You've got to look at the particular assets, right? I mean, If something is a bad asset, you know, you may just need to sell it. Right. So wouldn't say that the right answer for everyone is just a, hold on to all of your assets until you die. But there's definitely you know, but that definitely would be a consideration.
So that kind of takes us a little bit, maybe, Brian, to this idea of managing our risk and our mix of assets. Again, I, we've been on this theme around diversification. Yeah. Kind of close the, the thought there as we get to the end of this third episode in this
series.
Yeah. So the vast majority of investment in financial advice, that's out there, it was targeted at individuals that are saving for their own retirement. And that's really good because that's what most people are doing. Take risk early. And then reduce the risk as you age. If you've ever seen a target date fund, right. Maybe your business has target date funds for employees that are investigating 401k plans, or maybe you have invested in target date funds before. Those funds have lots of stocks. They have lots of risks. Then over time they buy more bonds, they take less risk. All of that is based on the theory that we are trying to save to some point in our seventies, maybe our eighties. And you know, maybe we can have a philosophical conversation about what that is.
But over time we want to take less risks because we're going to pass away. And you know, we're going to have spent down our assets and our goals are achieved at that point. But when we're thinking about multi-generational wealth, We're not doing that. We're not just trying to support our own retirement over a 30 year trend over a 30 year period. We're trying to support our family over 50 years or over a hundred years. We're trying to create a springboard for the next generation. So your investment strategy has to be closer to that of an endowment, which is pretty different than a normal retirement saver. That means you probably need to own more business equity and more stocks, fewer bonds fewer sort of lower risk assets over the long-term, even though you may be getting further along in life. And so your goals are different in your business, in your investment strategy. Need to be different when you're thinking about multi-generational wealth, as opposed to. Stuff that's just targeted at saving for retirement. So I think it's important for folks to sort of watch out for that and make sure that they're just not sort of blindly falling for the stuff that's out there in the press about investing. If your goals are not really aligned. With the goals of folks that they're really talking to.
Awesome. I think we, we've covered some really great material here. Help us synthesize down everything that we've talked about in this. You know, third episode of our series.
Yeah. So I think the first thing is engaged with your kids in training. Um, and you want to start really young. Uh, have them, uh, own assets and use budgets and make financial decisions. When they're young, we talked a little bit about college planning and about how that, how that's a really good way to start. If you haven't already. Uh, started doing that at that point. Um, estate planning is a journey. It's not an event. This is kind of the second thing that we started talking about. And so it's important when we're training our kids up because we're going to start transferring assets over many, many, many years. We're start transferring assets on that journey earlier in the process.
So that training becomes really important in that is how we effectively mitigate estate taxes in a lot of, uh, scenarios. Uh, Speaking about tax mitigation. Uh, we talked about a couple of strategies there and we said there's lots of them, but, um, two in particular around life insurance and then waiting to get a step up in basis. So those are potential things to think about. Uh, we talked a little bit about charitable foundations and how you don't have to be a Ford or a Rockefeller to have a charitable foundation. A donor advised fund might be a really good solution. Um, even if you just have a few hundred thousand dollars, um, that you want to be invested. Um, in charity in your community over time. And then we kind of closed out around risk management. I'm just thinking about how your goals as a multi-generational investor are not the same as folks that are simply saving for retirement and so you need to invest differently um more like an endowment less like a normal retirement saver so there's some real differences in how you should invest over a long periods of time
Awesome. Thanks so much for recapping for us, Brian, this episode, we've got three awesome episodes in this series where we kind of started out with their most foundational information about, building, multi-generational wealth. Then we talked about engaging the kids and getting them along in the journey.
And this last episode has been more about managing this asset through throughout time, estate planning, managing taxes, those kinds of things. So if you haven't gone through and listened to all three episodes, highly encourage that you do that and start from episode one of this series. We will see you next time.
We will see you next time