One of the aspects that I like most about my job is learning about the unique objectives of families. Interestingly enough, many financial planning goals of my clients are not always apparent from the onset of the relationship. One area of consistency, though, that I find among affluent families is a focus on preserving generational wealth.
There is certainly a large degree of complex planning needed to ensure your hard-earned assets are distributed according to your wishes and kept out of the hands of the government. In this article, I share five strategies I use when helping affluent families preserve their generational wealth.
Strategy #1 – Bring a multi-generational approach to asset allocation
For many people, it’s prudent to reduce portfolio risk as you get older: your investment time horizon shortens as you age, which means your portfolio has less time to recover from a significant market correction if one should occur. We frequently use a variety of different strategies with a goal of reducing a portfolio’s correlation to the market for this reason.
For affluent families managing generational wealth, however, the investment time horizon doesn’t just depend on one or two people, but on generations of the family; accordingly, the investment time horizon may be much longer. Bringing a multi-generational approach to asset allocation means creating a strategy driven by 1) your family’s tolerance for risk and liquidity needs (rather than just your own) and 2) your personal investment objectives.
Affluent families should also consider asset location as much as asset allocation. Asset location focuses on the types of accounts you own assets in. Often, accounts that are earmarked for the spouses’ retirement funds are more conservative, while accounts designed for future generations may be more aggressive.
Strategy #2 – Maximize your gifting
Strategic gifting is an excellent way to lower your estate tax burden. A common—and relatively straightforward—strategy for reducing your potential estate tax liability is to ensure you take advantage of the annual gift exclusion each year. For 2022, the amount an individual can gift a recipient without needing to file a gift tax return is $16,000, and a married couple can gift up to $32,000. Important to note that this exclusion is per recipient — so a married couple could gift $32,000 to as many recipients as they’d like during the 2022 tax year.
In addition to the annual gift exclusion, the lifetime gift tax exemption limit is at a historic high: $12.06 million per individual, or $24.12 million for married couples filing jointly. However, this increased limit may not be around forever: the legislation that raised the lifetime limit includes a sunset clause, and unless new legislation is passed that makes the increased limit permanent, the lifetime cap will be reduced to just $5 million per individual ($10 million per married couple) starting on January 1, 2026.
By taking advantage of this historically high exemption limit and gifting during your lifetime, you can remove assets (and any appreciation of those assets) from your taxable estate, which, in turn, reduces the taxable burden on your estate and your heirs.
Strategy #3 – Formalize your philanthropic strategy
For many affluent families, philanthropy plays a central role in their long-term wealth management strategy. If supporting philanthropic efforts is important to your family, consider creating a Donor Advised Fund (DAF) or a family foundation to provide structure around the giving process.
DAFs are funded with cash, securities, and other assets, and contributing to a DAF allows you to take a tax deduction at the time of the contribution. You can designate a successor advisor who would take over the DAF at your passing and direct all future donations from the fund. If you prefer that the fund liquidates and you donate all of it at your passing, you can pre-select which 501(c)(3) organization will receive a donation at your death and the DAF will automatically be liquidated.
Family foundations, also known as private foundations, are funded in the same way as DAFs; however, family foundations can give future generations of your family greater control over the philanthropic process. While DAFs can only donate to 501(c)(3) organizations with a family foundation, grant-making decisions are entirely at the discretion of the foundation’s board (typically family members).
Both vehicles offer significant tax benefits, though DAFs do offer greater tax deductions on donated assets; however, as noted above, DAFs offer less flexibility in where the family wealth can be used for philanthropic purposes. Family foundations, on the other hand, may offer less significant tax benefits but greater flexibility to bring younger generations into the philanthropic process.
Strategy #4 – Explore how trusts can help preserve generational wealth
Trusts can be a valuable tool for protecting the wealth you’ve built and ensuring that as much of that wealth as possible is passed on to the next generation.
A trust is a legal vehicle established through a fiduciary arrangement between the asset owner and the trustee(s) to hold assets on behalf of the beneficiary or beneficiaries. Affluent families use trusts for a variety of reasons, including (but not limited to): to protect assets from estate taxes, to allow assets to pass to heirs while avoiding probate court, to protect assets from creditors, or to leave a charitable legacy.
If you haven’t done so already, look for opportunities to use trusts as a means to make things easier on heirs and leave a more meaningful legacy. Given that there are a number of different types of trusts, we are happy to work with you to determine the best types of vehicles to use.
Strategy #5 – Consider life insurance as a tool for paying estate taxes
Most people use life insurance to help cover living expenses in the event of an untimely death, such as mortgage payments and medical costs. For many affluent families, life insurance can offer another benefit: paying estate taxes.
Irrevocable life insurance trusts (ILITs) are often used for just this purpose. With a typical life insurance policy, the death benefit is paid out upon the insured’s passing, and the policy’s value is added to the gross estate value for tax purposes. But with ILITs, since the life insurance policy is owned and controlled by a trust outside of the estate, the proceeds from the death benefit don’t count as part of the policyholder’s estate. Therefore, they are not taxable as part of the estate. In addition, that death benefit payment can be used to cover any estate taxes that may be incurred.
We’ve helped families establish ILITs as part of a robust estate planning strategy, and we can help guide you through the process and ensure your trust is properly drafted.
You have worked hard to acquire wealth—not just for yourself, but for generations of your family to come. The strategies outlined above can help preserve more of your family’s wealth and allow future generations to build on a foundation of financial stability.
Our team can work with you to better define your objectives and how to accomplish them, as there’s no “template” for what your goals should be.
If you have questions about any of these strategies, we invite you to connect with our team.
 Kiplinger, How to Use Your Estate Plan to Save on Taxes While You’re Still Alive! (link)
 This figure is subject to an inflation adjustment, so it will likely be higher. Information was obtained from the IRS website. (Link)
 National Center for Family Philanthropy, How do donor-advised funds compare with private foundations? (Link)
This article contains general information that is not suitable for everyone. The information contained herein should not be constructed as personalized investment advice. Reading or utilizing this information does not create an advisory relationship. An advisory relationship can be established only after the following two events have been completed (1) our thorough review with you of all the relevant facts pertaining to a potential engagement; and (2) the execution of a Client Advisory Agreement. There is no guarantee that the views and opinions expressed in this article will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.
Strategic Wealth Partners (‘SWP’) is an SEC registered investment advisor with its principal place of business in the State of Illinois. The brochure is limited to the dissemination of general information pertaining to its investment advisory services, views on the market, and investment philosophy. Any subsequent, direct communication by SWP with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of SWP, please contact SWP or refer to the Investment Advisor Public Disclosure website (http://www.adviserinfo.sec.gov).
For additional information about SWP, including fees and services, send for our disclosure brochure as set forth on Form ADV from SWP using the contact information herein. Please read the disclosure brochure carefully before you invest or send money (http://www.stratwealth.com/legal).