Estate Transition: Empowering Generational Wealth

According to Investopedia, more than $68 trillion is expected to change hands to next generations over the next 25 years.  The latest figure, according to Forbes, is an estimated $84 trillion. The transition of an estate from experienced hands of one generation to the untrained hands of the next generation may be overwhelming. 

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​Transitioning estates are often laden with unintended expectations and financial barbwire, if not effectively thought through. Throw in a splash family drama during a time of grief, and you have the perfect recipe for disaster. A successful Transition requires building a generational bridge of collaboration and understanding. Appropriate communication, detailed organization, clear planning, and appropriate governance are your tools to success. 

Clear Communications: Clear communication sets the stage of expectations between generations. The first step is a personal decision regarding “Fair vs. Equal” treatment of heirs. We dive into detail about what this means in our blog, Generational Wealth: Fairly versus Equally.

The next conversation you need to have is with your heirs. Your beneficiary(s) need to understand what is expected of them during various phases of transition. This includes asset transfers made upon retirement, when health-related issues require power of attorney oversight (medically and financially), and when the time comes for full distribution of assets & holdings in accordance with your last will and testament. 

While it is almost always uncomfortable having these conversations, families that do have a smoother transition, fewer challenges, and often preserve greater wealth for future generations. 

All Assets Accountable: An inventory of family assets is a key organizational aspect of estate planning. This is an area where no assumptions can or should be made.  Generalizations may paint a picture, but details are the substance that matters here. Your estate documents should include a full inventory of assets, that is updated whenever any item changes. This can include everything from: who is managing the asset, to who is named as a beneficiary depending on the asset.

What are Your Family Assets and Where are they Held? 

• Are there any Trusts or Individual Ownerships of assets?
• Do we have an investment portfolio?
• Is there a family business or multiple business interests?
• Do we have Life Insurance in place?
• Are there Pensions, 401(k)s, IRAs, or other additional investment accounts?
• Are there Residential/Commercial Real Estate interests?
• What is the maintenance budget? Do these assets need renovation? 
• Are they owned through a Corporate Structure or Individually?
• Are there multiple checking and savings accounts? Safety deposit boxes? Is there a transfer at death policy in place?
• What social security is being drawn? Are there any dependents that could benefit?
• How much of our Estate Exemption has been used? 
• Do you know how Long-Term Care is to be provided and where it is held for Mom & Dad? 
• What are the expectations for care? Home Care or Nursing Home? 

Many individuals pride themselves on taking on challenges head on, as this has served them well throughout their lives. However, you may pay a price for being overambitious. The price ranges from misplaced assets, misinterpretations of legalities, interest accrued, or opportunities missed. Organization of family assets and a succession and continuity plan is essential, so these components are not overlooked. Again, including your heirs in this planning process with clear communication increases the chances of a smooth and successful transition.

Building generational wealth often takes decades to produce and the transition of these hard-earned assets typically takes place without the creator’s supervision. Tedious organization discourages any future mishaps. ​

Proactive Tax/Succession Planning: Your heirs need time to digest your transition plan, instead of reacting to financial stress in a time of grieving. The last thing anyone wants to go through is trying to calculate how much of an estate tax obligation they face, while grieving. Proactive measures help lessen the burden in these moments. Being able to calculate the estate tax that will be owed well in advance, affords the opportunity to determine where the cash will come from to pay the tax. This could be built into the estate plan with a life insurance policy.

In our “Equally or Fairly” blog, we shared critical factors to a family business’ transition to its next generation. Succession and continuity planning is not just for business owners, but for families as well. 

Appropriate Governance: This is where the importance of working with a professional comes into play. There are procedures and compliance factors to be adhered to, timetables to meet, and often multiple parties involved.  You don’t want to be caught in the “I-don’t-know-what-I-don’t-know” scenario. There will be questions you may not know to ask, which is where the Professional may step in. Experienced estate planners, who have assisted with generational estate transitions, and who understand the additional nuances of transitioning multigenerational family assets are generally worth their weight in gold. However, you need to work with an individual who is trusted throughout the family.

A first introduction afterwards, when the transition has begun, won’t do. You and your heirs need to sit down beforehand to discuss the particulars of your plan and allow everyone to come to a synergistic understanding. Advisors excel at helping their clients retain wealth and empower generations, as they plan for this transition for the years ahead. Allowing them to oversee the completion and implementation of this financial plan will help retain Generational wealth for decades to come. Then your heirs may begin the cycle anew with developing and managing their own Financial and Succession plans for the next generation.

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CASE BRIEF: For Generations to Come

A founding business owner and his wife were ready to focus on an estate transition plan including their adult children in their mid to late 20’s. What was unique in their transition plan was that one of their children is active in the company, while the other is a professional in a separate industry. In addition, the couple owns a vacation house, which they would like to stay in the family for future generations. To be considered were multiple assets (both liquid & illiquid), guidance for asset transition, along with an asset that will require capital for maintenance and improvements. 

The first focus needed to be a conversation surrounding “Equal vs. Fair?”. It is important to work out financial priorities regarding how heirs are to be treated before the conversation on transitioning assets. 

We asked the following:

• Are we splitting the business ownership evenly between both children? Is this arrangement between the children Equal? 
• Should the child that has spent time working in the Family Business receive full ownership, while the other child receives all the liquid investment accounts? Is this division Fair for both?

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​Once these distinctions were understood and determined, we began designing their transition plan. 
The best course of action started with formalizing agreements within the business. Clear expectations and legal agreements were created in the event of a transition or retirement, idenifying who would succeed into the business.  Term insurance in the interim was secured to cover any unexpected expenses during this process. The term duration coincided with the expected length of time before the official handoff of the business is to be made. 

Next, we turned our attention to creating an Irrevocable Trust for the family’s vacation house. Both heirs will have equal access to this Family retreat moving forward, with neither possessing controlling ownership. A Life Insurance policy was purchased within the Trust to provide necessary working capital in the future. As this is a beach house, there will be significant capital requirements to maintain this asset. An added benefit is this asset is now outside of their Estate and not a Taxable asset. This route avoids a forced sale, or a potential buyout scenario, for both heirs as well. 

The couple already owned other permanent insurance policies, that will assist with debt reduction at the time of their passing. Their liquid assets are being preserved and managed for their retirement lifestyle, with the remainders as pure inheritance. 

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In the above case study, with their Estate Transition Plan in effect, the children will have financial and lifestyle independence. There will be a family retreat for generations to come, and they have avoided financial conflict during a period of grief. All accountable assets have been organized and structured proactively with Estate Taxes in mind. The remaining factor in this transition is appropriate governance of their estate. 

The couple's primary goal is for future generations to be given better opportunities, choices, and futures than they themselves received. It was our job to make this dream into a reality. 

Empowering generations,

Riley

Riley Hudack
​www.financialsynergistics.com