From Riches To Rags In Three Generations: Managing Generational Wealth Checklist

When discussing multigenerational wealth it is common to come across proverbs that acknowledge the fact that generational wealth typically won’t make it past the third generation. In the United States the saying goes, “from shirtsleeves to shirtsleeves in three generations.” [i] In China it is said, “rags to rags in three generations.” [ii] 

Generational wealth encompasses financial assets with a monetary value. These include investments, real estate, land, cash, collectibles, etc., that are passed from generation to generation.

 Why does wealth seem to disappear within three generations? Several reasons include:

• Mismanagement of wealth leading to an inheritance tax burden
• A growing family
• Spendthrifts
• Lack of financial education for those who are receiving the inheritance

If you have concerns about assets being passed down, please view our checklist and determine where you stand.

 ☐  Do you participate in effective gifting?

Using the annual gift exclusion and lifetime exemption is an effective strategy for passing on wealth to beneficiaries without being subject to significant tax responsibilities. The gift tax exclusion for 2023 is $17,000. That means both parents are allowed to give someone up to $17,000 per year ($34,000 per person), to as many people as they want. Should any of their gifts happen to exceed the gift exclusion limit, the amount in excess will go toward the lifetime exclusion amount which is currently $12.92 million in 2023. [iii]

 ☐  Are you familiar with how trusts work to preserve generational wealth?

Trusts are legal entities that preserve wealth and allow the issuer of the trust to distribute the wealth as they see fit. They mitigate the risk of beneficiaries losing assets through lawsuits, divorce, or unexpected occurrences, and trusts also provide certain tax incentives. They can help you avoid probate, provide for a disabled beneficiary, establish a spousal trust, and other benefits. There are a variety of options to choose from and it is encouraged that you consult a financial professional to help you determine what works best for you and your family. Some of these trusts include:

• Living trusts
• Charitable and Charitable Remainder trusts
• Testamentary trusts
• Dynasty trust
• Spendthrift trust
• Irrevocable trust

 ☐  Are you teaching financial skills to the children who will inherit your wealth?

It is critical to teach children the value of saving and how to invest. This can help to preserve the wealth they will one day inherit. It is a common theme that beneficiaries who inherit wealth will be tempted to spend it. However, this may stem from the fact that they don’t understand how to make the money work for them. Parents can educate their children and grandchildren on investing in financial instruments like stocks, bonds, CDs, annuities, and real estate interests. They can walk them through preparing a budget, provide them with financial literacy books, and even consider granting them a small sum of money to practice money management (while the parents monitors their progress).

 ☐  Do you know how taxes affect generational wealth as it is passed down?

Depending on the amount of assets distributed to beneficiaries, and the manner in which they are passed down, the act of giving may trigger a gift tax. There are several methods of giving that can help to lessen the tax burden including:

• Annual gifting
• Lifetime gift exclusion
• Charitable giving
• Taking capital losses to offset capital gains
• Deduct medical expenses that exceed 7.5% of your adjusted gross income
• Tax credits can be more beneficial than tax deductions as they lower your tax bill dollar for dollar as opposed to reducing your taxable income, like the plug-in electric vehicle credit and residential energy efficient property credit [iv]

 ☐  Do your beneficiaries understand the value of compounding wealth?

The earlier they begin investing money, the more beneficial the compounding interest will work on their behalf. The idea is long-term growth. To take full advantage of compounding wealth you have to be patient. A few common ways of investing where your interest compounds over time include:

• Dividend stocks
• High-yield savings accounts
• Bonds and bond funds
• Certificates of deposit (CDs)
• Real estate investment trusts (REITs)
• Simple interest annuities

 It is highly encouraged that you enlist the help of a financial professional to learn which investments would be appropriate for you and your family’s generational wealth distribution goals.

 ☐  Is there a family member you want to help with education expenses?

A popular way to transfer wealth is by paying for a family member or friend’s education. With this strategy, the tuition is paid directly to the institution, which permits the giver to be exempt from gift taxes. Money used for books, room and board, and other educational expenses is not tax exempt.

 If the preservation of wealth over multiple generations is a plan that you are interested in exploring, consider consulting a financial professional who can help you design a strategy to pursue your financial goals.

Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

An increase in interest rates may cause the price of bonds and bond mutual funds to decline.

CD’s are FDIC Insured and offer a fixed rate of return if held to maturity.

Non-traded Real Estate Investment Trusts (REITs) invest in commercial real estate or real estate related debt, but unlike exchange-traded REITs are not listed on a national securities exchange. Non-traded REITs differ from exchange-traded products with similar strategies, and can carry significant risk that should be understood prior to investing. Significant risks include, but are not limited to: sector concentration, geographic, illiquidity, interest rate, change in governmental, tax, real estate, and zoning laws, and debt. Alternative investments, including REITs, may not be suitable for all investors, and the strategies employed in the management of alternative investments may accelerate the velocity of potential loss.

Fixed and Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.

LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by LPL Marketing Solutions

Footnotes:

[i] How to beat the third-generation curse (smu.edu.sg)

[ii] Why wealth lasts 3 generations ? - Entrepreneur Post

[iii] IRS bumps up estate-tax exclusion to $12.92 million for 2023 (cnbc.com)

[iv] 9 Best Ways to Lower Your Taxes - Experian  LPL Tracking # 1-05361300