This post was authored by Adem Tumerkan, Dunham's Content Writer. If you have questions concerning today's topic, please call us at (858) 964 - 0500. Hold us to higher standards.

Have you heard the saying, “shirtsleeves to shirtsleeves in three generations”? This Scottish proverb encapsulates a stark reality: families often build wealth through hard work, only to see it dissipate by the third generation.

A comprehensive 20-year study by the Williams Group of 3200 families revealed that:

• 70% of wealthy families lose their wealth by the second generation.
• 90% lose it by the third.

Now, with an unprecedented $84 trillion wealth transfer expected over the next two decades, preserving generational wealth is more critical than ever.

Figure 1: Arkos Global, 2021

Quite an issue, right?

Thus, as we stand on the brink of the largest wealth transfer in history, making sure that this generational wealth endures has never been more critical.

That’s where the importance of a financial advisor comes into play - especially for the younger generations poised to inherit this wealth in what’s being called the “Great Wealth Transfer.”

Here’s why...

Here’s why...

Understanding the Great Wealth Transfer

I’ve written to you about this wealth transfer before – but to give you some context:

Over the coming two decades, there’s a mindboggling amount of money that’s being passed down from the baby boomers to Generation X (born 1965 to 1981) and Millennials (1981 to 1996).

To put this in perspective - according to Cerulli Associates² – there’s an estimated $84 trillion that will change hands between now and 2045, with most coming from high-net-worth baby boomers.

• $30 trillion will go to Gen X households.
• $27 trillion will pass to Millennials.
• Over $500 billion is currently inherited annually by children of high-net-worth and ultra-high-net-worth households.
• $72.6 trillion is earmarked for heirs, while $11.9 trillion will go to charitable causes.

And at its peak, this will represent 10% of the total wealth in America changing hands every five years.

So, while this is a massive boon for the younger generations, it also comes with the significant risk that the wealth will evaporate by the third generation.

But here are some strategies financial advisors can talk about with their wealthy clients to try and preserve as much as they can for many generations to come.

Key Wealth Preservation Strategies

Financial advisors can help families preserve their wealth by implementing the following strategies:

Setting Up Trusts

Trusts can be powerful tools for financial advisors to manage and protect assets for heirs. They allow mom and dad to specify how and when the assets will be distributed, thus ensuring the wealth is preserved and used wisely for future generations. Trusts can be designed with staggered payouts or tied to specific milestones, such as education or starting a business.

Revocable Trusts

This trust allows your clients to transfer assets into a trust while retaining full control of their assets during their lifetime. They can change the trust at any time until their death, at which point it becomes irrevocable. Assets are then transferred to beneficiaries as specified by your client, typically bypassing probate. Your clients can place provisions in their revocable trust that irrevocably lay the groundwork for multi-generational wealth preservation as you will see in our next discussion on irrevocable trusts.

Irrevocable Trusts

An irrevocable trust is used to protect assets, reduce taxes, and preserve wealth for your client's future generations. Unlike the revocable trust we just discussed, with an irrevocable trust you transfer ownership of assets to the trust permanently. Once set up, you cannot easily change or cancel it. This type of trust can include some important wealth preservation provisions.

Within the irrevocable portion of a revocable living trust or with an irrevocable trust your client can incorporate provisions designed to avoid the shirtsleeves to shirtsleeves in the three-generation cycle. These provisions can include:

1.      Generation-skipping provisions

2.      Incentive-based distribution clauses

3.      Discretionary distribution powers for trustees

4.      Education funding stipulations

5.      Family bank provisions for loans or investments

6.      Phased distribution schedules

7.      Professional trustee requirements

8.      Family governance structures

Trust designed to reduce taxes

These trusts are designed to help save taxes, disinherit the IRS, and leave more to your client’s family. Some of these trusts include Spousal Lifetime Access Trusts (SLAT), Grantor Retained Annuity Trusts (GRATs), and Intentionally Defective Irrevocable Trusts to name a few. Call our Business Development Team for more information on these trusts.

Life Insurance Trusts

For clients with insurable assets, an Irrevocable Life Insurance Trust (ILIT) is a powerful tool to avoid estate taxes entirely. Properly structured, ILITs can:

• Eliminate estate, income, and capital gains taxes on life insurance proceeds.
• Expand the estate's total value without additional tax liability.

Incorporating ILITs alongside strategic trust provisions ensures wealth preservation and seamless asset transfer.

Asset Protection Trusts

Protecting heirs' inheritance is as important as growing it. Asset Protection Trusts shield wealth from:

• Creditors and lawsuits.
• Beneficiary mismanagement.
• Divorcing spouses in some jurisdictions, such as Nevada.

These trusts give trustees control over distributions based on predefined terms, offering long-term financial security and family stability.

Dynasty Trust

Think of a Dynasty Trust as a way of not paying estate taxes for up to 1,000 years if the trust’s situs is Wyoming, while passing wealth to multiple generations in a protected structure for multiple generations. The trust can include provisions for education, incentivized distributions, and professional management, ensuring responsible wealth preservation potentially far beyond the typical three-generation cycle.

Education and Financial Literacy

Even the best financial plans can falter without knowledgeable heirs. Advisors should prioritize financial literacy to equip beneficiaries with the skills needed to manage inherited wealth.

• Offer money management workshops and investment education.
• Engage children in estate planning conversations to prepare them for future responsibilities.

Early education fosters responsible financial habits and ensures smooth transitions across generations.

Family Governance

Strong family governance aligns members on shared financial goals and values. Key strategies include:

• Holding regular family meetings to discuss wealth management.
• Establishing a family council to oversee joint financial decisions.
• Crafting a family mission statement as a guiding principle for wealth preservation.

Introducing younger generations to trusted financial advisors ensures continuity and a unified approach to wealth management.

Breaking the "Shirtsleeves to Shirtsleeves" Cycle

By combining trust-based strategies, financial literacy, and robust family governance, advisors can help clients preserve wealth across generations.

The $84 trillion wealth transfer presents both opportunities and risks. Proactive advisors can turn this challenge into an enduring legacy for their clients.

Dunham specializes in assisting financial advisors with comprehensive trust services and wealth preservation strategies.

Contact our Business Development Team today through email or (858) 964-0500 to learn how we can help you provide the best guidance and support for your clients and their family’s long-term financial success.

Sources:

1. https://www.advisorhub.com/resources/securing-the-family-tree-how-to-preserve-generational-wealth/
   
2. Press Release: Cerulli Anticipates $84 Trillion in Wealth… | Cerulli

Disclosures:

This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance. All examples are hypothetical and are for illustrative purposes only.

Information contained in the materials included is believed to be from reliable sources, but no representations or guarantees are made as to the accuracy or completeness of information.  This document is provided for information purposes only and should not be considered as investment advice.

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