In part one of our three-part series with Shawn Deyell, Chartered Professional Accountant from RLB LLP, we asked our investors what topics you’d like to learn more about. Based on the feedback we received, there was an overwhelming response from investors to get a deeper insight into generational wealth and how to manage it efficiently so it can continue to grow. Shawn has taken the time to share his expertise on the subject and has written an insightful article on how to create a legacy.
Shawn Deyell has been with RLB since 2006 and specializes in Tax Advisory services. Shawn’s problem-solving skills and expertise in trust and estate planning services have helped his clients succeed and grow beyond themselves.
We hope you find this article insightful. If you have any questions about generational wealth planning, please be sure to connect with your Tax Professional.
Generational wealth, sometimes called family wealth or legacy wealth, is where there is wealth passed from one generation to the next. This could range from providing funds to help pay for education or a down payment on a home, to substantial wealth expected to sustain multiple generations to come. Anyone building wealth beyond what they will use or spend should consider how to manage generational wealth, with particular care and planning being important for those who will pass along significant wealth to the next generation. Generational wealth is often built over time through some combination of growing investments, ongoing income streams from a business or employment, and controlled spending and savings.
There is an adage about generational wealth and an unfortunately common situation where the first generation builds wealth from nothing, the second generation maintains it, and the third generation squanders back to nothing.
Properly addressing generational wealth can help the transferring generation understand their wealth and provide them with personal security and freedom. The next generation receiving wealth may be given a head start such as through funds for business start-ups, education, or housing, and through financial education that may help them with their own wealth management. Charitable or philanthropic goals may be a key part of effective generational wealth management and transfer, giving comfort to the first generation that they are not giving beyond their means and providing an opportunity to the next generation to participate in charitable and philanthropic activities.
Steps in securing a strong financial legacy should include:
(1) Clarifying your current situation and what wealth you may have already or are in the process of building.
(2) Understanding your goals and what wealth and cash flow requirements are needed in the future, which may involve discussions with a spouse or other family members to understand their goals and needs that will be linked to yours.
(3) Developing a personalized plan around your goals to best achieve them.
Involving a wealth or business advisor in developing your plan can be helpful to make sure you have a complete picture of your current situation, ask the right questions, and provide guidance in setting goals by understanding your needs. They can provide the best strategies structured to help you accomplish your generational wealth goals.
A common reason many people delay planning for generational wealth is the belief they have not yet built enough wealth to start this planning. Starting earlier is always beneficial as it ensures the first generation has sufficient wealth built while building for the next generation at the same time. Beginning the process now can help to identify key future benchmarks, when a change in strategy might be appropriate or how to adjust planning for a change in the situation, rather than reacting and missing valuable wealth-building opportunities that come with foresight.
Best Practices for Generational Wealth Planning
Beyond involving advisors to assist, several other best practices for generational wealth planning include:
- Create and adjust plans to fit goals, not fitting goals into potential strategies – Planning should be driven by the individual and family goals for generational wealth. Considering the best way to save taxes, for example, should be a factor but should not be the only consideration where it runs counter to the goals. For example, a designated beneficiary on a registered investment may provide the best tax result but would not fit where the value of that investment is intended for someone else.
- Ensure plans are clear, understandable, and documented – This may include well-written wills, net worth summaries that are updated regularly, and summaries outlining structures put in place and how they are to be used. Knowing your own plans is important, but ensuring others can know those plans could be critical if you cannot fully complete them. Estate litigation is an increasing problem that may be minimized through clearly documented plans, saving precious time and stress and preserving wealth that could otherwise be wasted through litigation.
- Build wealth beyond just financial resources – The value of cash, investments, real estate, and profitable business ownership are typically areas of focus for wealth planning, but other aspects of wealth should be properly considered as well. The value of a family business may consider factors beyond its possible sale price, such as its ties to family history, the reputation within the community, and the opportunity for employment of future generations. A family home or cottage may be valued for the memories and nostalgia well beyond its market price. Also, charitable and philanthropic efforts do not directly contribute to family wealth but may be considerations in wealth planning, whether through a formal foundation or other structure or an informal part of family values.
- Educate future wealth recipients – Financial education is arguably the most effective way to prevent the hard-earned generational wealth from being squandered by the next generations. While this may take the form of a financial degree or courses, informal education and communication are perhaps much more important. Someone transferring wealth should communicate long before any transfer takes place, including knowledge and skills they have developed for wealth management and wealth building, the intentions for how transferred wealth should be used, and expectations and responsibilities for the next generation on how to preserve or grow wealth they are given.
- Factor in liquidity with generational wealth planning – Spending some wealth and ensuring sufficient cash flow are part of good planning even where maximizing generational wealth is the main goal. Plans should consider ongoing expenses and timing for spending on more significant items to allow you to appropriately enjoy your wealth. Investing in illiquid investments with higher returns may not be appropriate where they do not produce sufficient cash flow. For example, a life insurance policy that provides no access to funds until death is ineffective for financing retirement.
- Build in flexibility and revisit plans regularly – Circumstances can change drastically, and goals can also change over time. A flexible plan can help to reduce the stress and cost of such changes, possibly preventing the need to unwind a plan and start again. Revisiting regularly helps to ensure plans are on track or to adjust and realign with new circumstances or goals.
Options to Consider when Structuring a Plan
Family trusts are structures often used in generational wealth planning, with the possibility to hold investments and assets that grow in value over time, and flexibility on accessing that wealth or passing it to the next generation. Another structure is a corporation which can be used to hold investments rather than holding personally, allowing future growth to build for the next generation potentially without triggering tax on the change of investment ownership from personal to corporate. Similarly, existing corporations may use an ‘estate freeze’ to capture existing value in shares owned by the current generation and provide new shares to the next generation which builds future growth.
These structures outlined can be effective for generational wealth transfer, reducing estate taxes and often providing the current generation with control over assets or investments, and typically may be put in place without triggering immediate tax consequences. With any structure used, it is important to ensure that it is properly tailored for the individual and family’s overall wealth planning goals, and proper implementation to ensure it functions effectively and does not fall offside tax rules or other requirements.
When building out a viable plan that suits the needs of you and your loved ones, it’s always best to consult with a tax professional or your Advisor to ensure you leave a lasting legacy for generations to come.