Wealth Preservation: How to Ensure Generational Wealth Lasts

By Heather Conway, J.D. – Vice President & Relationship Manager

“The Great Wealth Transfer” – Have you heard of it? Or better yet, will you be a participant in it? The Great Wealth Transfer refers to the trillions of dollars in the United States that the Baby Boomers (those born between 1946 and 1965) and members of the “silent” generation before them (born between 1928 and 1945) are set to transfer to future generations. According to various sources, the total intergenerational wealth to change hands will be around $85 trillion.

If you find yourself fortunate enough to be within the class of people who will be passing on significant family wealth, you may be wondering how best to transfer assets to the next generation(s) with an eye toward seeing that it lasts and that it is done efficiently from a tax perspective. Here are a few things to consider:

Implement Trusts in Your Estate Plan.

Trusts are the gold standard in the wealth transfer toolbox. A savvy estate planning attorney can explain to you the various types of trusts and which ones might suit your situation best. A common strategy includes a credit shelter trust to lock in the applicable estate tax exclusion and the generation skipping transfer tax exemption, while providing income for a surviving spouse.

Another type of trust that is brought up often is the dynasty trust, which, if drafted properly, can spread the wealth among generations for years to come. Trusts are incredibly flexible instruments that can also provide for incapacity and keep matters private – properly funded trusts avoid the hassle, expense and visibility of probate.

Deploy the Step-Up in Basis.

The “step-up” in cost basis is a common method of avoiding capital gains taxes on an appreciated inherited asset. Instead of inheriting the asset at the decedent’s cost basis, the asset receives a step-up in basis, to the date-of-death value of the asset at the decedent’s death. If the recipient then sells the asset, they will only pay capital gains taxes on the difference between the date of death value and the market value – a huge tax savings.

Be Wary of Transfer Taxes.

Transfer taxes apply to the transfer of property from one person or entity to another. Gift tax, estate tax and generation-skipping transfer tax all fall into this category. Most people are somewhat familiar with gift and estate tax and are aware of the applicable exclusion amounts (currently $19,000/year for gift tax; $13.99 million lifetime exclusion for estate tax), but fewer are aware of the benefits of lifetime gifting versus inheriting at death, or gift-tax free direct payments to medical and educational institutions.

Estate tax planning is generally geared toward the implementation of various trusts (see above) and tax elections as is generation-skipping transfer tax planning. ALL of these transfer taxes (along with any applicable state inheritance taxes!) should be part of the wealth transfer discussion.

Educate Your Heirs.

You can only control your wealth for so long, even beyond the grave. Your assets will eventually end up in someone’s hands – do they know what to do with them other than spend them? Have you had discussions with your loved ones about money management?

Some trusts impose, as a condition of receiving funds, a requirement that beneficiaries take a financial education course or meet with a financial advisor beforehand. You could also include beneficiaries in your annual investment reviews so they can see what goes into the multifaceted development of wealth. Or you could have family meetings where you talk about your goals for your family’s wealth and get input from some of those of the X- Y- and Z- generations. You might be surprised to find out what they are thinking about!

The Great Wealth Transfer is underway. If you are among those impacted, congratulations — and be sure to consult qualified professionals to help preserve and manage your financial legacy.