6 minute read
Have you ever heard the saying, “shirtsleeves to shirtsleeves in three generations”?
It’s a Scottish proverb that describes how families can start with little means, build wealth through hard work, and eventually lose it by the time the great-grandchildren are in charge – returning to their original state of having nothing.
This highlights how grandchildren often struggle to manage and sustain the wealth passed down from their grandparents and parents.
· To highlight this point, a 20-year Williams Group study of 3,200 families1 found that 70% of wealthy families lose their wealth by the second generation and a staggering 90% by the third.
Figure 1: Arkos Global, 2021
Quite an issue, right?
The preservation of family legacies and wealth through generations is a critical issue. These findings underscore the importance of connecting with top clients’ children early, fostering relationships, and setting up strategies to help protect them.
And as we approach the largest wealth transfer in history, making sure this wealth endures may be more crucial than ever.
Thus, having a financial advisor is important for younger generations as the ‘Great Wealth Transfer’ ramps up.
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. Generation X households are expected to inherit close to $30 trillion, while millennials will receive more than $27 trillion. Currently, children of high-net-worth and ultra-high-net-worth households inherit over $500 billion annually. Of the $84 trillion, $72.6 trillion is earmarked for direct heirs, and $11.9 trillion is designated for charitable causes through gifts and bequests.
· 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.
Strategies for Financial Advisors
To mitigate the erosion of wealth over generations, financial advisors can employ several effective strategies including
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
If your client is insurable, consider an Irrevocable life Insurance Trust (ILIT). When properly implemented, an ILIT can escape all estate taxes as well as income and capital gains tax. Life insurance in this trust not only increases the size of the estate but also to preserve these assets, consider incorporating some of the provision we discussed above.
Asset Protection Trusts
These trusts protect an heir’s inheritance from creditors and lawsuits, and sometimes even from the beneficiary's own financial mismanagement. With a Nevada trust, it may even protect against divorcing spouses, keeping the assets with your client’s family. The trustee controls the assets and makes distributions according to the trust's terms, potentially shielding the assets and providing long-term financial security.
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
In addition to the use of trusts, financial advisors should focus on educating heirs about money management, investment strategies, and the responsibilities of inherited wealth. Financial literacy programs and workshops can foster responsible financial habits. Involve children in estate planning discussions to prepare them for future responsibilities. This is an important step that should be taken sooner rather than later.
Family Governance
Implementing family governance structures - such as regular family meetings and establishing a family council - can align family members on shared goals and values. This ensures a unified approach to wealth management. Introduce children to the family’s financial advisor and consider creating a family mission statement to guide financial decisions.
Wrapping It Up
As financial advisors, the ultimate goal is to turn the timeless adage “shirtsleeves to shirtsleeves in three generations” into a call to preserve clients' hard-earned wealth for their descendants.
By guiding families with thoughtful, strategic advice, advisors can help make sure that wealth is not only preserved but also grows - benefiting generations to come.
The key lies in early engagement, education, and the implementation of wealth preservation trust strategies.
In doing so, advisors can help their clients rest easier knowing their families for generations to come will be protected.
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:
- https://www.advisorhub.com/resources/securing-the-family-tree-how-to-preserve-generational-wealth/
- 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.
Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA/SIPC. Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc
Trust services offered through Dunham Trust Company, an affiliated Nevada Trust Company.