Published on February 11, 2021
Wealth is not just about the money or the assets you make throughout your lifetime, but it is a legacy created out of your sweat and blood. It is something you would want your progeny to honor and value. However, maintaining wealth across generations comes is rather challenging. Research has revealed that 70% of families see the depletion of their assets by the second generation. At the same time, 90% lose it by the third generation. Let us first try to understand why it is challenging to keep multi-generational wealth.
The first generation spends a lot of time and effort to earn money to secure the next generation’s future. Therefore, as the second generation knows about their financial security, it doesn’t work as hard as its ancestors. This impacts the third generation, and they do not have enough for a secure future. They have to work as hard as the first generation to secure enough finances for themselves and their children. This vicious cycle goes on.
It is natural for parents to think that their children shouldn’t have to struggle for money and leave plenty for them. However, it is equally important to teach successive generations to realize the importance of finances and not waste it. These teachings go a long way in protecting wealth across generations.
When it comes to ensuring the security of wealth, there are several ways through which you can keep your multi-generational wealth safe from getting misspent.
A life insurance is a contract between the insured and the insurance company wherein the latter pays a lumpsum to the family of the insured upon his death. To ensure this sum, you have to pay premiums throughout your lifetime towards the policy. Life insurance is one of the most popular ways globally to safeguard your wealth and pass it onto your dependants responsibly. Typically, term life policy and whole-life insurance are the two most important types of life insurance that you can opt for. Term Life is a pure insurance policy without any benefits. Its sole purpose is to indemnify your dependants in the event of the policyholder’s death. On the other hand, a whole life policy, besides providing life coverage, also comes with a component called the policy’s cash value which grows gradually in a tax-deferred account. Nothing is simpler than opting for a life insurance for your family’s financial security. It is must in your investment portfolio.
You have put in your life to create this wealth, and it’s your responsibility to safeguard it for the future as well. Hence, you must draw an estate plan with the help of your lawyer. A will is an integral part of this plan. It would provide your family with the exact manner to use your wealth after your death. If you wish to divide your assets, such as businesses and properties amongst your children, you can mention that specifically in your will. This way, everybody will have clarity about what is to be done with your wealth. Your assets will also be passed on as per your wish. Moreover, your plan will also have legal binding so that no one can dishonor it under any circumstances.
It’s high time people realize the importance of creating a will. There has been a drastic decline in the number of persons forming a will in the US. Caring.com’s annual survey reveals that in 2017, 42% of all Americans stated that they have a will or another type of estate planning document. While in 2020, 32% said they have one or more forms of estate planning. That implies nearly a 25% drop in three years.
One of the best ways to pass on your wealth is to pass it on to a trust. Creating a trust is also a part of the more extensive estate planning. It is used to minimize wealth tax and protect your wealth beyond your lifetime. A trust is a fiduciary set up giving access to a third-party trustee to hold your wealth or assets on your behalf. You can specify the exact terms of the trust and the pattern of distribution.
There is also an option of establishing an irrevocable spendthrift trust so that you can access your assets as long as you live. Post that, you can designate the rest of the assets to be passed on to your progeny in the ratio you want. Being irrevocable, this trust abstains a beneficiary from attaching any vested interest in the principal or interest of the trust.
Setting up a generation-skipping trust can also be one of the smart options. This is applicable when you are sure that your immediate children aren’t prudent financial managers and would mishandle your wealth. Through generation-skipping trusts, you can pass on your wealth to your grandchildren or further down the line instead of your direct heirs. This way, you can be sure that your reckless successors, if any, do not squander your wealth.
You may also set up a charitable lead trust, so that a certain amount of your assets are dedicated for philanthropic purposes and the remaining to your beneficiaries.
Whenever you open a financial account, you have the option to list a beneficiary. It is the person who would receive your funds after your death. Hence, you must take this opportunity and appoint a trusted person as your beneficiary. This way, you will be relieved of the stress of your fund being misused. It will also save your family from a lot of hassles and disputes regarding your funds.
Everyone wishes to leave behind memories to cherish and assets enough to fulfill their successors’ dreams. However, the wealth can take care of your children after you only if it is handled prudently. So, approach your financial advisor and attorney to extensively devise your wealth’s best possible use and distribution and thoroughly understand the estate taxation perspective. In 2020, we saw the worst in terms of finances. The COVID-19 pandemic has taught us the significance of financial planning like never before. Hence, in 2021, it is your foremost responsibility to chalk out a holistic estate plan and reduce financial-stress.