4 Key Elements to Protecting Family Wealth

4 Key Elements to Protecting Family Wealth

It’s a fact: 70 percent of family wealth disappears in the next generation and a whopping 90 percent evaporates by the third generation. In other words, if you have significant wealth, your grandchildren may only see about 10 percent of it.

Why? Well, the reasons for the evaporation of family wealth are wide-ranging and differ from family to family and person to person. It could include poor decisions, ignorance about how to handle money, multiple extravagant purchases, falling stock markets, family strife, and more.

But one factor is constant: the statistics are stark enough that, if you want to pass on family wealth, you need to know why and how to fight the statistics. 

If you are looking for wealth management in Santa Rosa, CA, or for do-it-yourself tips on how to manage your family’s wealth, read on!

1. Communication is Key

If you’re wealthy, you need to communicate with the next generations about that wealth. This isn’t common: 64 percent of wealthy people say they have discussed little or nothing with their children about their finances. The reasons vary. Some worry that realizing their eventual wealth will make children lazy or unmotivated, and others worry that children’s awareness will lead to general awareness, and perhaps even danger to the family from unscrupulous people.


Find out how to protect your family’s wealth.  Contact Montgomery Taylor Wealth Management to see how we can help.


First, if children are to inherit a considerable amount of money eventually, they should be told openly about it at an appropriate age. If they’re not, they may get an idea that money and any discussion of it is somehow shameful or secret — which can be a disaster. Second, they should be receiving training in financial literacy. 

How to handle money — especially a large amount of it — isn’t intuitive! Third, it’s a very good idea to communicate your values and how you think money should be handled. Are you a family that believes in giving back? Are there particular causes or charities your family supports?

You should also communicate and observe the personality and interests of your children and grandchildren. Sometimes wealth dissipates because the family business or decisions about wealth are given to people with no interest in it (or little aptitude). If you see little interest, it might be better to have a trustee oversee the amount of income distributed or for other family members to have more of a role in business decisions. 


2. Planning is Key 

All of these communication streams (that your children will inherit wealth, how to handle money, and what your values are) require some planning. 

A professional can help you educate the next generation on how much money there is, how it is invested, what it supports (in terms of assets such as homes and portfolios and in terms of businesses or charities), how it is handled currently (portfolios, trusts, foundations) and what options exist for the handling of it. 

It can be a good idea to bring your children and grandchildren into your planning at appropriate ages. Grandparents can discuss everything from houses to savings accounts with children. They can accompany you to meeting with financial planners to go over portfolios and more.


3. Understanding Taxes is Key 

Folks who inherit wealth need to understand taxes. If they don’t, mistakes in tax planning alone (or just the failure to optimize taxes) itself can be a major dissipator of wealth. Failure to pay taxes, or pay them accurately, after all, results in penalties and fees!

There are many ways that folks with considerable wealth can minimize their taxes. In 2022, for example, you can give individuals (relatives or friends) gifts of up to $16,000 per year without having to pay tax on it. 

Over the years, this can be used to effectively transfer assets every year free of tax, up to a lifetime cap of $12.06 million. It can also be used to lower your overall bequeathable amount to avoid estate taxes. (For 2022, estate tax is levied on estates of more than $12.06 million.)

Gifts are only one way to avoid estate taxes. You can also set up a qualified personal residence trust (QPRT) to transfer ownership of your home to a beneficiary, such as a child or even a grandchild. You can continue to live there during the term of the trust, but after that, it goes to your beneficiaries, without gift tax. 

With a QPRT, you’re transferring the ownership of your home into a trust. During the trust’s term, you can continue living in your home without paying rent. After that term ends, your beneficiaries can take over your property. The market value is also frozen once a QPRT goes into effect, which can also minimize tax.

Multiple other strategies exist, such as charitable giving, asset protection planning, setting up a family limited partnership, and more. Because of the interplay between tax strategies and wealth management, it can be a very good idea to use a CERTIFIED FINANCIAL PLANNER™ Professional for financial advising who is also a Certified Public Accountant (CPA).


4. Professional Help is Key

Don’t try to set up communication, planning, or tax strategies alone. You should consider getting professional help for protecting family wealth early and utilize it frequently.

A qualified professional can help you in many ways, as discussed above. They can also help you in general estate planning. A Last Will and Testament or a Trust are key ways in which people bequeath their wealth. If you don’t draw up a Will or have a Trust, the lack can be a key factor in failing to pass along wealth to the next generations. 

Why? Well, if you should pass away intestate, the disposition you wanted for your assets isn’t clear. Frankly, even the assets themselves may not be clear (location, size, access) to survivors. Lawyers and other advisors may be hired to step in and clarify matters. 

Lawyer fees can end up dissipating at least some of the generational wealth. If your family members dispute the disposition of your assets, they can hire even more lawyers and generate ill-feeling, both of which are prudent to avoid. If taxes are owed on any assets, probate will identify that, and your estate will need to pay back taxes and may need to pay fees and fines. 

A professional can make sure that your generational wealth is preserved both when you are alive and after you pass away. 

At Montgomery Taylor Wealth Management, we understand the nuances of generational wealth and can help put together a plan to protect your family’s legacy. Contact us today for a complimentary consultation!


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