I’m a Financial Advisor: Here’s What Not To Do With Generational Wealth
Maybe you were born into money or perhaps you earned the fortune. Regardless, if your family has money, you want to preserve it.
GOBankingRates spoke with several financial advisors to learn what not to do with generational wealth.
Do Not Be Too Generous
You might be inclined to use some of your family money to help others, but Mike Kazakewich, CFP, and partner at Coastal Bridge Advisors in Westport, Conn., warned against being too generous.
“The biggest mistake some clients make is gifting large sums to family members without thinking about their own long term-needs and the potential for longevity,” he said.
Do Not Be Too Rigid
It might make sense to attach guidelines to the use of family money, but Kazakewich warned against taking it too far.
“Your heirs may need access to the funds at some point to start a business or for medical or education needs,” he said. “Be sure to write in provisions allowing them access for critical expenses.”
Do Not Overcomplicate the Structure
If you put guidelines in place for the money, be careful about making it too complex.
“Advanced structures may fully maximize both gifting capacity and tax efficiency,” Kazakewich said, “but … the administration complexities and expenses may diminish the long-term benefits of the gifts.”
Do Not Create Extra Tax Issues
Making sure your grandchildren are taken care of is smart, but do it the right way.
“If clients make gifts to their children that are financially secure on their own, leaving wealth to them could pose tax issues,” Kazakewich said. “Instead, consider making gifts to grandchildren through vehicles like generation-skipping trusts or starting 529 college savings accounts.”
Do Not Nominate Older Trustees
It’s not uncommon for clients to nominate trustees to oversee trusts that will benefit their children, but Kazakewich advised being mindful about the person’s age.
“By the time those trusts are funded,” he said, “beneficiaries often find themselves working with trustees that are decades older than they are and may not be willing or able to serve in the role.”
Do Not Neglect Financial Education
Even if you hire someone to manage your wealth, it’s also important to stay informed yourself.
“Neglecting to educate yourself or your heirs on personal finances and wealth management can result in poor decisions that erode generational wealth, leading to generational poverty,” said Jason J. Hamilton, CFP, CRPC, founder of Keep It Simple Financial Planning. “Therefore, it’s vital to continue learning about such matters in order to stay informed.”
Do Not Neglect Estate Planning
It’s not something anyone wants to think about, but Hamilton advised getting your affairs in order.
“Failing to create an adequate estate plan could result in unnecessary taxes, legal battles and mismanagement of assets,” he said. “Be sure to create a well-structured estate plan which clearly outlines how your wealth will be distributed among generations.”
Do Not Overspend
When a large sum of money is at your fingertips, it can be all too easy to overindulge.
“Excessive spending, indulgence in luxury items and living beyond one’s means can quickly drain a family’s wealth,” Hamilton said. “To preserve it for future generations, establish sound budgeting practices, implement disciplined spending habits, prioritize saving and investing efforts and implement sound spending practices such as disciplined savings plans.”
Do Not Forget To Diversify
Putting your money in one place and leaving it there might be easy, but it isn’t smart.
“Over-reliance on any single investment or asset class is risky, which is why diversifying across various industries, sectors and asset classes will help mitigate it and protect your wealth from sudden changes in particular areas,” Hamilton said. “A well-diversified portfolio may even provide protection from catastrophic events in specific regions.”
Do Not Forget Tax Planning Costs
Thinking about taxes isn’t exactly fun, but you can’t afford not to.
“Failing to take steps toward tax planning could incur unneeded tax liabilities, hindering generational wealth creation,” Hamilton said. “Work with tax professionals or advisors on developing strategies that optimize your tax position while increasing wealth retention.”
Do Not Fall Behind Economic Changes
Current economic conditions can impact your wealth, so you need to be in the know.
“Economic landscapes change constantly, and failing to adapt can significantly erode generational wealth,” Hamilton said. “Be informed on economic trends, investment opportunities and market shifts so that your strategies can adjust accordingly.”
Do Not Create Confusion With Heirs
Family money can be a blessing, but a lack of communication can also make it a curse.
“Miscommunication between you and your heirs regarding wealth and financial plans can lead to mismanagement, confusion or conflict,” Hamilton said. “Hold open and honest dialogues about wealth, values and expectations so as to ensure a seamless transfer.”
Do Not Neglect Philanthropy
When you have more than you need, it’s only right to help others.
“Failing to incorporate philanthropy and giving back into your generational wealth plan may create an entitlement mentality among heirs, while diminishing its positive influence in society,” Hamilton said. “Encourage philanthropy within your family and involve your heirs in charitable activities.”
Do Not Misuse Trusts and Financial Advisors
Hiring an advisor to handle your wealth doesn’t mean you should take an entirely hands-off approach.
“Trusts and financial advisors can be great tools, but depending solely on them to manage your wealth can be risky,” Hamilton said. “Stay engaged by reviewing investment performance regularly, as well as revisiting financial plans regularly to make sure they align with your goals.”
Do Not Fail To Adapt to Evolving Family Dynamics
Family matters can be complicated — especially when money is involved.
“Family dynamics change over time, and failing to adjust can compromise generational wealth preservation,” Hamilton said. “Remain connected with family members, address conflicts proactively and seek professional assistance navigating complex familial dynamics.”
Do Not Upgrade Your Standard of Living Without a Plan
Money can’t buy happiness. In fact, not having a plan for your funds can eventually leave you miserable, said Mark Struthers, CFA, CFP, founder and financial advisor at Sona Wealth, a financial planning firm in Minneapolis, Minn.
“For health and wealth, there needs to be more to life than shopping,” he said. “Changing your standard of living without a plan can lead to spending more than the wealth can maintain.
Do Not Change How You Raise Your Kids
“Money does change people sometimes in discrete ways,” Struthers said. “I have had clients that would often keep their middle-class lifestyle until the kids were older, to make sure they had an environment that raised their kids according to their values.”
You want to give your kids the best, but really think long and hard about what that means for your family.
Ultimately, this type of wealth can allow your family to live comfortably for generations. Hopefully these tips will help safeguard both your money and relationships with loved ones, so you can make the most of this good fortune.
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