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There is an adage about three generations of wealth – the first generation makes it; the second generation maintains it and the third generation spends it. It is universal – from Italy (”from the cowshed to the stars to back to the cowshed”) to China (“wealth never survives three generations”). However, with the right plan in place, this certainly does not have to be the case. I will outline some best practices that will work for anyone who is looking to preserve and grow their wealth across generations.Create a clear financial plan. Without proper planning, wealth will be lost to taxes, bad investments, exorbitant professional fees or unpreparedness of your heirs. Implementing a financial road map that clearly outlines how the wealth will be managed and invested while also including tax planning strategies will aid in a successful outcome. Work with a financial planning professional specializing in this area and one who has worked with families whose wealth is similar to your own. If there is a family business involved, that will also require a specialist.Educate your heirs. Many Americans don’t want to talk about their money and estate planning with their family. An April 2022 survey of adults with investable assets of at least $100,000 found that only 19% were completely transparent, with reasons such as they think it's none of their family’s business, it’s not necessary or they want to avoid conflict among their heirs as to who is getting what. Pass down information if the family wants their wealth to last multiple generations. By passing down the experience and wisdom from those family members who have either earned the wealth or have the experience of managing it successfully, these lessons will enable the next generation to have the tools to continue on a successful trajectory. If the family is largely inexperienced in handling a large amount of wealth – and there are many examples of those who have lost it due to lack of management skills – then a financial advisor, attorney and tax professional should be brought in to educate the family.
Evaluate the assets to determine if they will last through generations. These assets should be resistant to inflation as well as political and economic turmoil. Real estate is one of the best asset classes when you're dealing with generational wealth. It can be in holdings in land, residential housing, air space, mineral, water and/or fishing rights, commercial or industrial properties. Real estate is one of the best hedges against inflation as it can provide income; it's an asset always in demand; and can be leveraged to suit the risk tolerance of the family. Real estate also has tax advantages due to the power of 1031 exchanges. (A 1031 exchange is a swap of one real estate investment property for another that allows capital gains taxes to be deferred.) For example, it allows a smaller initial investment in an a property to be rolled into a larger property without having to pay income taxes at the time.
Some specific areas of real estate that work particularly well for building generational wealth are farmland and timberland. Timberland consistently provides returns not tied to the performance of the stock and bond markets. It also can outpace inflation, which tends to be a concern for families with multi-generational wealth. Farmland is another classic asset that wealthy families have invested in over many generations. While falling under the category of real estate, it has certain unique characteristics including resistance to inflation, a low correlation to other assets, historically provides decent performance and, if managed well, can last generations.
Evaluate other investments including precious metals, collectibles and corporate stock. Precious metals including gold and silver have been considered a storage of wealth for well over 2,000 years. While these metals have been separated from all paper or fiat currencies, they are still perceived as money and one of the best forms of money because they are durable, divisible, convenient, consistent and have value in and of itself. Gold and silver are assets that retain purchasing power over long periods of time. The types of collectibles are almost limitless, and can include cars, paintings, artwork, stamps, vintage wines, coins and rugs. A collectible is defined as an item that either has value (wealth preservation) or might have greater future value (speculation). Corporate stock is a proven way to outpace inflation over long periods of time, survive political and economic turmoil, and potentially provide income to the family. Not all company stocks will be good long-term investments, but if chosen properly, this asset class can help to sustain a family's wealth through multiple generations. One reason that company stock outperforms inflation is companies are often able to pass along the inflation to their customers through higher prices. If the company pays dividends, this also provides an additional revenue stream.
Take an active role in investments particularly in the area of startups, thereby using wealth to fund future growth. Entrepreneurs are starting new businesses every day across the country, with one of their greatest challenges being the lack of proper funding to build and grow the business. By investing in startup ventures or other potential ventures, this allows family members to take more of an active role with their investments. This provides them with experience in managing their wealth as well as allowing additional opportunities to invest in areas that they have a personal interest in.
The next big area to examine is tax awareness. For most people, the largest expense they will pay throughout their lives is their tax bill. Implementing the right strategies to mitigate this bill will significantly aid in wealth accumulation. This can start with a 401(k) plan or if self-employed, utilizing other opportunities in putting a retirement plan in place. Hiring a tax expert is critical when creating a solid estate plan. Be sure that advisor is familiar with both income and estate tax systems.
By implementing this framework, with an emphasis on thorough communication and education of all involved and the addition of a knowledgeable financial advisor, the continuation of wealth through the generations can be both a successful and rewarding process.
Colleen Kelleher Sorrentino, CFA is with Kelleher Investment Advisors, a New York-based investment advisor. Stacey Mankoff is with The Mankoff Company LLC, a New York-based marketing firm serving the financial industry.
1 Americans Don't Want to Talk About Their Generational Wealth, Bloomberg, April 6, 2022
Read more articles by Colleen Kelleher Sorrentino and Stacey Mankoff