Once a family has significant wealth, the problem becomes how to preserve it for future generations—a surprisingly difficult task. Effective multigenerational wealth management requires a family to tackle the personal issues that determine who should benefit from the wealth, the tax hurdles that stand in the way of its efficient transfer, and the capital markets’ uncertainties that make it challenging to invest it prudently.
Calculating Lifetime Spending Needs
The critical first step in planning is calculating the senior generation’s lifetime spending needs. Disaggregate family wealth into “core” and “excess” capital. This will drive a family’s decisions about both asset allocation and wealth transfer. The senior generation’s “core capital”—the minimal amount they need to maintain their lifestyle—should be invested in a balanced mix of traditional, liquid assets. “Excess capital”—any wealth in excess of their core capital—should be earmarked for future generations and charities, and allocated in a fashion that matches the risk profile, time horizon and needs of those beneficiaries. This bottom-up approach to a family’s asset allocation—building the mix, generation by generation—can materially enhance overall wealth without putting the senior generation’s lifestyle at risk.
“Excess capital’ should be earmarked for future generations and charities.” [Tweet This]
Identifying Wealth Transfer Strategies
After the various portfolios are sized and invested, the senior generation should use one or more transfer strategies to move their excess capital to their desired beneficiaries in a tax-efficient manner, in the right proportions and at the right speed. By using these strategies in concert, most investors can move all of their excess capital out of their estates during their lifetime while still maintaining ample flexibility to stop or change the course of wealth transfer at any time. In addition to moving wealth to children, basic gifts and appropriate trusts can pass a surprising amount to grandchildren and more remote descendants transfer-tax-free.
With enough time and careful planning, wealth is moved from one generation to the next, and the one following. Many families will have specific objectives or challenges that require other wealth transfer strategies. Our team at Abacus is dedicated to helping you determine multigenerational wealth management strategies aligned with what is most important to you.