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How to transfer wealth between generations

A bottom-up approach to a family’s asset allocation can materially enhance overall wealth.

The more money your family accumulates, the more complex it can become to decide how much to invest, what to buy, which strategies to apply, what to bequeath, and how to minimise transfer taxes. The number of beneficiaries for your family’s assets may also increase as your wealth grows. As a result, there are likely to be emotional issues to take into consideration since inheritance can be a sensitive subject even for close families.

These include deeply personal questions, such as who the primary beneficiaries of the wealth should be, how fast the wealth should be moved to those beneficiaries, and whether the wealth will spoil younger generations or create conflict or resentment among family members. Further, the first generation must determine what safeguards they need to put in place to ensure that the funds are spent responsibly and to retain enough flexibility, so they can adjust their wealth transfer plans if their circumstances or desires change.

In the beginning, a family’s wealth is determined by the success or failure of a few individuals. As their wealth slowly grows, limited capital is concentrated into one or two strategies such as short-term, high-yield investments collateralised with rental property to grow their current income or retirement benefits rapidly. Succeed in doing that, and the family has now created an asset capable of generating substantial, additional, passive cash flow beyond what is needed to support and meet the family expenses. At this point, the family’s wealth accumulation strategy must shift towards diversification. Creating a diversified financial portfolio results in simultaneous wealth growth and preservation. The family now must deploy some of the capital into other operations with good growth potential and in which the family has expertise. 

Multigenerational wealth planning should be to disaggregate family wealth into ‘core’ and ‘excess’ capital. This will drive a family’s decisions about both asset allocation and wealth transfer. The first generation’s ‘core capital’—the minimum amount they need to maintain their lifestyle—should be invested in a balanced mix of traditional, liquid assets. Their ‘excess capital’—any wealth in excess of their core capital—should be earmarked for future generations and should be allocated in a fashion that matches the risk profile, time horizon, and needs of those beneficiaries. This bottom-up approach to a family’s asset allocation—building the mix generation by generation— can materially enhance overall wealth without putting the first generation’s lifestyle at risk.

After the various portfolios are sized and invested, the first generation should use one or more transfer strategies to move their excess capital to their desired beneficiaries in a tax-efficient manner, in the right proportions, and at the right speed. We’ve found that many families can achieve most or all their wealth transfer objectives using only a mix of basic estate planning, gifting and incentive trusts. By using these strategies in concert, most investors can move all their excess capital out of their estates during their lifetimes while still maintaining ample flexibility to stop or change the course of wealth transfer at any time. The key is scaling the amount committed to a “rolling” transfer strategy up or down to meet the family’s objectives.

That folks, is how you transfer wealth.


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