Many Americans aspire to leave a financial legacy. According to a recent survey by Empower, 40% of Americans say leaving an inheritance for their children is part of having a happy retirement. And while this is a worthy — and achievable — financial goal, it does require careful planning.
To find out how Americans can best build generational wealth, GOBankingRates spoke with Jim McGowan, CFP, wealth management advisor at Apollon Financial, about the strategies he recommends to his clients.
Here’s what McGowan advises for building long-lasting wealth.
Have a Diversified Approach
A generational wealth portfolio must address different timelines and goals. Some people may need to rely on it for lifestyle expenses today, while that same portfolio also needs to provide for younger generations years from now. So it needs a growth component along with preservation.
The key is diversification across multiple asset classes. Assets for shorter time horizons include cash and fixed-income investments such as bonds. Longer-term assets might be real estate and private investments — including private equity, private credit and private real estate.
Create Goals Around Your Wealth
Before you even get into investments, you need to decide what the goal is for this wealth. I have conversations with families about their values: Do they value education? Do they value entrepreneurship? Do they value faith or church? That can start you down the right path.
The process starts by defining each goal and the funding amount needed. Then we put it in the proper accounts and figure out how we want to disperse or grow those accounts. Then it finally comes down to what’s the allocation — the actual specific investments we want to choose.
Understand the Tax Implications of Your Wealth Transfer Plan
I like to educate people on taxes. I think a lot of people don’t understand the difference between estate tax and inheritance tax. Estate taxes apply at the federal level. Right now, the estate tax exemption is $14 million per person, so $28 million for couples, so it doesn’t touch most people.
It seems like a crazy number, but with real estate, the way the value has increased over the years, I’ve had clients with large properties or land that do need to plan for this.
Most states impose an inheritance tax, and that’s something families really do need to plan for. For example, in Pennsylvania, there’s a 4.5% inheritance tax on any money passed to children or grandchildren. So, one thing that I do with clients is, instead of giving all your money to your children and then they eventually give it to their children — triggering inheritance tax twice — look into giving some to your children and then also some directly to your grandchildren, typically in the form of a trust.
Utilize Life Insurance as a Way To Pass on Wealth
I had three women clients who called themselves “The Golden Girls.” They lived together in a beautiful, older house they’d shared since their spouses passed away. Two women owned the house equally and the other woman didn’t. Their goal was to pass the house among themselves until the last person passed.
In their wills, each left their share to another. But in Pennsylvania, if you give to a friend, it triggers a 15% inheritance tax, so two women would have had to pay 15%. This house was the biggest part of their estate. If they were to give it to somebody and have to take 15% off the top, they would have to come up with cash to pay the inheritance tax or sell the house.
We put the house in a trust to avoid those taxes, but life insurance is another powerful tool for managing inheritance taxes. If you fund a life insurance policy, at death, the beneficiaries receive an influx of cash income-tax-free. Then they’re able to cover the inheritance taxes and also potentially fund the maintenance of the house for future generations.
