Building Generational Wealth: The Do’s and Don’ts of Wealth Transfer

The largest transfer of wealth in the nation’s history will take place over the next 25 years. This transfer of wealth to future generations is driven in large part by countless individuals who have accumulated modest wealth over a lifetime of work and investing. How did they do it? And how can you build wealth during your lifetime to pass on to your heirs?

Wealth Transfer and Taxes

The “great wealth transfer” is the financial industry’s term for the transfer of an estimated $30 trillion from the baby boomers to generations X, Y, and Z, according to Steve Lindsay, senior vice president of business development at Bankers Trust.

“It is already happening, and it will continue and accelerate for decades as the baby boomer generation reaches retirement age and begins passing wealth to children and grandchildren,” he said.

Baby boomers have saved vast sums of wealth over their lifetime due to different variables including attitudes towards saving, equity performance, and estate, among others.

“They have also benefitted from large estate exemptions, which are currently due to sunset in 2026 and will be cut in half,” said Cory Garlock, financial advisor at RBC Wealth Management. “As they pass away, they are leaving large legacies in the form of assets for their next generations and nonprofits.”

“With continued changes to estate and inheritance taxes at federal and state levels, estate planning and the consideration of advanced estate and tax planning strategies are crucial to minimize the tax impact for future generations,” Lindsay said.

The tax burden of leaving money to the next generation should always be a planning consideration, according to Katie Bruno, financial advisor with Morey & Quinn Wealth Partners.

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“As a result of the SECURE Act of 2019, most retirement account beneficiaries will need to draw down the account fully within 10 calendar years of the original owner’s death,” she said. “This may increase an heir’s tax rates during these 10 years. That higher tax rate should be considered in a retiree’s current withdrawal strategy and may make Roth conversions or tax-deferred distributions in retirement more beneficial.”

Also under current tax law, the cost basis for inherited investments in taxable accounts is the value at the owner’s death. Known as a “step-up in basis,” this effectively makes gains during the original owner’s lifetime tax-free for heirs.

“This benefit is why you may want to hold taxable assets as long as you can,” Bruno said.

Building Generational Wealth 

By definition, building generational wealth means that you are gathering resources not only for yourself but also for future generations.

“Communicate with loved ones to discuss legacy planning and other priorities [you wish] to instill in that next generation,” Lindsay said. “Before they inherit what you plan to give them, ask yourself, ‘How will this make a positive impact on the world?’ If you can’t answer that in a satisfactory way, you may want to reconsider your plans.”

The creation of an estate plan and periodic reviews with an experienced attorney is critical to protecting your loved ones, preserving your wealth, and minimizing taxes. No matter what stage you are at in life, take time to identify your financial goals and make daily decisions that put you one step closer to reaching those goals.

“Generational wealth looks different from family to family and generational wealth is a possible destination for more than just the ultra-high net worth,” Lindsay said. “It is crucial to have a long-term and disciplined approach to saving and investing. I don’t think a native Omahan can get away without quoting Warren Buffett: ‘Be fearful when others are greedy and be greedy when others are fearful.’ Families often place their focus on growing wealth and fail to recognize the importance of considering how that wealth should transfer and be preserved for future generations.”

It is important to make sure heirs understand how to be good stewards of the financial assets they have inherited. It starts with passing down values and making sure the next generation understands the responsibility and privilege they have been given.

“This is about passing down family values, which start with a series of conversations and actions that build upon each other,” Bruno said.  “It can start with a child in grade school understanding something as important as a tradeoff and why it is important to save money today versus spending.”

As a child grows, these conversations should focus on future planning and investing. Many people shy away from money conversations, but communication is a vital component of preserving family wealth.

“Among the many reasons people shy away from this is fear,” Bruno said. “Individuals fear that their kids could become greedy or may not have enough experience to manage the kind of money they will inherit. There are many great ways to interact with the next generation about money. One of those ways is bringing your children in for an annual review with your financial advisor.”

Building wealth is a long-term process and requires discipline and patience. Professional guidance can provide valuable insights and help an individual make informed financial decisions.

“Our No. 1 answer for building generational wealth is to create a ‘family process’ and diligently stick to it,” Garlock said. “Establish a structured framework of actions that bring your long-term financial picture into focus.”

For example, you might choose to review your retirement plan investments, savings rates, and performance semi-annually, in June and December.

Annually, look to annualize your insurance coverage and make sure you have the most cost-efficient options for the highest coverage possible. Work with an estate planner every two years to make sure your estate plan is intact, and it creates the legacy you desire. Quarterly, have a quick family check-in to review any life changes that have happened that might impact your financial future.

“Our team has developed and refined a process we call the G360 Process that helps our clients put all the pieces of their financial puzzle together,” Garlock said.

Trust the markets.

“Our team believes equities have proven to be one of the greatest producers of real, inflation-adjusted wealth available to the general public over long periods of time through growth of income and capital appreciation,” Garlock said.

RBC uses stocks to grow wealth, protect purchasing power, and meet planning goals. Keep in mind that your retirement could potentially be for more than 30 years.

“While our team takes a financial planning approach, we understand that a well-constructed, diversified investment portfolio is the engine that helps us achieve your goals,” Garlock said. “We utilize a value-added service team within RBC Wealth Management, which maximizes our impact with different areas of knowledge and experience.”

This internal extension of the firm’s team supports the seven pillars of its process that are critical to building generational wealth: investment management, wealth planning, risk management and insurance, tax considerations, estate planning services, cash and lending and philanthropic and charitable giving.

“As our clients reach retirement age and up, we understand they have unique needs and challenges that go beyond traditional wealth management,” Garlock said. “That’s why we built a network of closely-vetted professionals who can help our clients live more meaningful lives. Our longevity team aims to provide comprehensive support to our clients in all areas of their lives, with services ranging from estate planning and long-term care specialists to caregiver advocates and health care consultants. By assembling this team of outside experts, we hope to help our clients age well, maintain their independence, and achieve their goals for years to come.”

Common Wealth-Building Pitfalls 

To maximize your wealth, it’s crucial to live within your means and spend wisely.

One common wealth-building mistake is putting off estate planning or not updating your estate planning documents.

“With laws constantly changing, these should be reviewed every few years,” Bruno said. “What made sense when you drafted the documents, may not be the best plan now.”

Another wealth-building pitfall is neglecting savings and emergency funds. Not prioritizing savings can leave you vulnerable to unexpected expenses or financial setbacks.

Lifestyle creep and living beyond your means, overspending, accumulating excessive debt, and relying on credit cards will impede wealth accumulation.

Becoming too conservative upon retirement is a common mistake as well.

“CDs and money markets are now attractive given federal interest rate changes, but we feel this is short-term thinking,” Garlock said. “If leaving a legacy for your next generations is important, and your financial goals are paid for and covered, continuing to own the great companies of the world you and I interact with every day is imperative. 

“Clients often think ‘to retirement’ and not ‘through retirement,’ which could potentially be over 30 years with medical advances. The reality is that once your expenses are covered you are investing for the next generation, and you need to keep that
in focus by continuing to have a portion of your assets allocated to equities.”

Don’t make emotional short-term decisions about saving and investing.

“[This] is so common and so avoidable,” Lindsay said. “Establish a long-term and disciplined investment approach that aligns with your personal risk tolerance.”

Decisions made purely to avoid taxation may also be short-sighted. Your overall financial plan should be the driving force in your investment decisions, and taxes should only be a consideration in the larger picture.

Another mistake is creating a savings/budget plan that is not realistic or sustainable for a long period.

“As with an extreme nutritional diet or workout regime, the plan generally isn’t sustainable over time and people may revert to even worse spending habits than before establishing the over-zealous savings/budget plan,” Lindsay said.

“We build what we call a WealthPlan for every client of ours,” Garlock said. “It helps us understand their current financial situation, identify their personal vision for retirement, and determine what steps they can take to meet them. 

“WealthPlan drives estate reviews for our clients — we engage with an attorney to establish ‘efficient transfer’ of assets to the next generation as our clients see fit. Through our ‘Philanthropic and Giving Pillar,’ we help align our clients’ resources with the causes and organizations that are most important to them. Through WealthPlan, we also offer insurance efficiency reviews, where our goal is to protect future assets and future income through insurance-based solutions for the next generations.”

Over the last two years, we have seen a stock market that has impacted a lot without really doing much.

“Total values have hardly changed in those few years, yet we have seen market values swing much higher and lower in that timeframe,” Lindsay said. “What this has proven is that the age-old mantra of being a patient investor will pay off. If you didn’t panic when the markets were lower, you are much better off today and closer to your goal of building wealth.”