Estate Planning Can Help Build Generational Wealth

You’ve probably heard the phrase, “You can’t take it with you.” And to some extent, that is true. Cash and real estate won’t be much use to you after you’ve passed. However, if you have children or loved ones, leaving something behind is likely important to you . Building and preserving wealth for the next generation is a way of protecting the people you love. Sometimes it’s a way of opening doors for them that were closed to you. Nurturing  generational wealth creates financial security for your children, grandchildren and everyone who follows in your footsteps. Estate planning is the process that smoothes the passage of that wealth from one generation to the next. Failing to do your estate planning puts everything you’ve built at risk.

Threats to Building Generational Wealth

There’s a lot more to building generational wealth than amassing a big sum of money. To protect what you’ve already earned and preserve it for the next generation, you’re going to want to watch out for some very expensive obstacles.  

• Estate taxes: Depending on where you live and how much your estate is worth at the time of your death, estate taxes could swallow a significant portion of your wealth before anything is passed on to your heirs. The federal estate tax currently only applies to the very wealthy because of the estate tax exemption. In 2021, an estate will only owe the federal estate tax if it’s valued at more than $11.7 million. A married couple may be able to shield up to $23.4 million from estate taxes. But the Biden administration may lower that threshold by more than half, making many more estates responsible for this tax. Plus, some states, including Massachusetts, levy their own estate taxes. Massachusetts’ estate tax threshold is just $1 million per person and married couples can’t combine their exemptions. This means that minimizing estate taxes requires a lot of planning here in the Commonwealth.

• Probate: Before an estate is settled and its assets are distributed, the estate has to go through probate. Probate can be long and expensive, even when the deceased had a valid will. The longer and more complicated the probate process, the more money an estate will lose to attorney fees and court costs. It may not be possible for your heirs to bypass probate altogether. 

• Family conflict: Distributing money and property among heirs can create conflict even within the closest families, especially when they’re inheriting wealth from a recently departed loved one. Emotions run high when money and grief are involved. It would be a shame for your heirs to spend tens of thousands of dollars on attorney’s fees to squabble over a minor asset, or for a fight about an inheritance to turn into a division that fractures the family. When conflict pulls everyone apart, individual heirs may take their shares and spend them recklessly instead of the family working together to keep everyone’s money growing.

• Poor financial judgment: What took you 50 years to build could take a financially immature grandchild months to squander. If there aren’t protections in place that govern how and when heirs can use their assets, all the money that you intended to sustain them for a lifetime could be quickly wasted on bad decisions. 

• Short-sighted planning: When you’re thinking about generational wealth, are you only picturing your kids and possibly grandkids? Planning with just the next one or two generations in mind may result in all the money being gone before your great-grandchildren can benefit. Similarly, if you have siblings or other relatives who might require additional financial support, it’s critical to consider them in your planning.

The Role of Estate Planning 

I can’t overstate the importance of estate planning in building and preserving generational wealth. Estate planning lets you exert some control over what happens to your assets when you’re gone. This process creates a framework to guide your heirs and the courts in their decision making around your assets. 

Through estate planning, you can establish trusts with strict requirements and benchmarks that beneficiaries must meet before accessing assets. Establishing trusts may help you pass assets to heirs outside of the probate system, and keep those assets from counting toward your taxable estate. Estate planning is also a critical part of preserving generational wealth beyond the first generation. This process is an opportunity for you to think about the guidelines you want future generations to follow, and to create a formal record of your wishes. 

Keep in mind that estate planning is about more than planning for what happens when you die. If you want to start passing on assets now, for example, you can work with your estate planning advisors to make tax-advantaged gifts or to establish a trust that a beneficiary can draw from right away.  

At Sachetta Callahan, we know that you’re not just working hard to acquire more money—you’re working to provide comfort and security to the people you love most, even once you’re gone. We want to help you with that. Reach out if you have questions about estate planning. Contact me today!

Matthew Stead joined Sachetta Callahan in 2014 as an intern. He now serves as a financial advisor, the go-to office IT person and the host of Sachetta Callahan’s podcast Fine Answers.