It’s natural to focus on market volatility as the primary threat to your financial resources. However, additional challenges tend to arise as your net worth increases. Predators, creditors, and other external threats can erode your family’s wealth if proper precautions aren’t in place.
While protecting your assets is a key component of any wealth management plan, it’s a critical step if you want to preserve generational wealth long-term. In fact, research shows approximately 70% of families lose their capital in the second generation and 90% lose it in the third. Fortunately, there are strategies you can leverage so that your wealth lasts well into the future.
Consider these five strategies to preserve generational wealth:
Wealth Preservation Strategy #1: Asset Titling
Proper asset titling is necessary to ensure your estate plan runs according to your wishes. In addition, it can protect you against excess personal liability in a lawsuit or other financial dispute.
If you’re married, one titling strategy that can help preserve generational wealth is tenancy by the entirety. A tenancy by the entirety permits spouses to jointly own property as a single legal entity. When two spouses are tenants by entirety, the surviving spouse immediately becomes the sole owner of the titled asset when the other spouse dies. Moreover, creditors typically can’t seize an asset that falls under tenancy by the entirety if only one spouse is responsible for the debt.
Wealth Preservation Strategy #2: Insurance
Many types of insurance can help protect your assets in case of an unexpected setback. However, life and liability insurance can be helpful strategies if your primary goal is to preserve generational wealth.
Depending on its size, your estate may owe federal and potentially state taxes when transferred to the next generation. A life insurance policy can help fund this liability so that your beneficiaries receive their full inheritance. In addition, you can use life insurance to provide your beneficiaries with a lump sum payout, which they can use to cover the expenses they incur upon your death. This can be especially helpful if most of your wealth is in property and other illiquid assets.
If you’re in a profession that exposes you to liability and frivolous lawsuits, you may want to consider liability and umbrella insurance. These types of policies can help protect your assets and preserve generational wealth if someone targets you.
Wealth Preservation Strategy #3: Limited Liability Entities
Wealthy families often leverage family limited partnerships (FLPs) and family limited liability companies (LLCs) to exclude certain assets from their taxable estate. These strategies can also help preserve generational wealth by safeguarding family assets against external predators and creditors.
It’s important to note that the laws and treatment of FLPs and family LLCs vary state by state. In general, families who form these limited liability entities no longer own the assets they contribute to them. Instead, they hold units or shares of the FLP or LLC. This limits member liability and allows for a tax-efficient transfer of assets to the next generation.
Wealth Preservation Strategy #4: Irrevocable Trusts
Many families use irrevocable trusts to preserve generational wealth. Once you transfer assets to an irrevocable trust, the trust becomes the owner of those assets. A trustee then has a legal obligation to distribute the assets according to the trust’s specifications.
Like a will, trusts allow you to specify how and when your assets are distributed upon (or prior to) your death. Unlike a will, they offer additional advantages such as privacy, certain tax exemptions, and increased protection against lawsuits and creditors. For these reasons, wealthy families often leverage trusts to efficiently transfer assets to the next generation.
Wealth Preservation Strategy #5: Asset Protection Trusts
An asset protection trust (APT) is one of the most effective strategies available to protect your wealth against creditors and lawsuits. As such, it can be a useful tool to preserve generational wealth.
An APT is an irrevocable, self-settled trust in which the grantor can be designated a permissible beneficiary. While the trust may allow for occasional distributions, these distributions can only take place at an independent trustee’s discretion. In addition, specific stipulations control how a beneficiary can spend, sell, or give away the trust’s assets.
Asset protection trusts can be advantageous in certain situations. However, because they are highly complex, they’re not appropriate for everyone. A fiduciary financial advisor or estate planning attorney can help you determine if an APT is right for your family.
Helping You Preserve Generational Wealth
Approximately 45 million U.S. households will transfer $68 trillion to the next generation over the next 25 years, according to Cerulli Associates. With this “great wealth transfer” already underway, it’s never too early to start incorporating these strategies into your financial plan.
If we can help you and your family preserve generational wealth and plan your legacy, please schedule a call. We’ll help you determine which asset protection strategies are right for you, so you can feel confident your wealth will last for generations to come.