Many of our clients have investments they believe will continue to grow forever. These resources could be a running company, a collection of investments, commercial real estate, or any combination of these. In whatever form, the owner wants the asset to survive and prosper for future generations in addition to living past them.
Although this is a noble goal, wealth tends to erode over time as it passes down through generations. Corrosive complexities may arise: The asset’s legal structure may provide difficulties. Family dynamics and communication can get tangled. Malthus’ Law also applies: Unless an asset grows in tandem, the number of family members is likely to increase exponentially, which could become a burden.
These difficulties are solvable, and the rewards of doing things correctly can be delightful. Here are a few strategies to set yourself up for long-term asset growth. Everything begins with the right setup, which is within your control if you are the wealth owner.
The desire to leave a lasting legacy for future generations is deeply ingrained in many individuals. However, the reality is that preserving wealth across multiple generations can be a complex and challenging endeavor. The adage “rags to rags in three generations” highlights the common phenomenon of wealth dissipation within families.
This article delves into the strategies and insights that can help families overcome this challenge and build a foundation for lasting wealth. By understanding the key principles of generational planning, families can create a roadmap for preserving and growing their assets for the benefit of future generations.
The Importance of a Written Strategy
Traditional estate planning focuses on the distribution of assets after death. However, for generational wealth to truly endure a more comprehensive approach is required. This involves creating a written strategy that outlines the family’s vision for the wealth, establishes clear guidelines for its management, and ensures the transfer of knowledge and values to future generations.
The Three Pillars of Generational Planning
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Mindset: Shifting your perspective beyond immediate family members and envisioning the legacy you want to leave for generations to come This detachment helps in creating a long-term vision that transcends individual preferences and focuses on the collective well-being of the family lineage
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Open Communication: Fostering open and honest conversations with family members about your financial situation, intentions, and expectations. This transparency helps bridge the knowledge gap and empowers future generations to make informed decisions about managing the wealth.
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Written Documentation: Putting your intentions and plans into writing, creating a family constitution or set of bylaws that can be passed down through generations. This provides a clear roadmap for managing the wealth, ensuring continuity and consistency across generations.
The Role of Whole Life Insurance in Generational Planning
While investments are often seen as the primary driver of wealth growth, specially designed whole life insurance policies can play a crucial role in a generational plan. These policies offer several advantages that align with the goals of preserving and growing wealth across generations:
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Guaranteed Death Benefit: The policy provides a tax-free lump sum upon the insured’s death, creating a significant financial resource for the next generation. This benefit can be used to purchase new life insurance policies for the next generation, perpetuating the cycle of wealth creation.
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Access to Cash: The policy’s high early cash values offer access to cash through policy loans. This provides flexibility for beneficiaries to meet financial needs while the cash value of the policy continues to grow uninterrupted.
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Guaranteed Cash Value Growth: The policy accumulates cash value at a consistent and predictable rate, offering tax-free growth without market risk or volatility. This predictability facilitates long-term financial planning and ensures a reliable source of funds for future generations.
Key Considerations for Generational Planning
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Articulate Your Vision: Clearly define your vision for the future and ensure buy-in from your family members. This shared understanding will guide the development and implementation of the generational plan.
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Communicate Effectively: Create a written document that details your vision, outlines the plan’s structure, and provides guidance for future generations. This document will serve as a reference point and ensure continuity across generations.
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Seek Expert Advice: Collaborate with competent professionals who have expertise in generational planning strategies, including estate planning attorneys, financial advisors, and insurance specialists. Their guidance will help you navigate the complexities of wealth management and ensure the plan’s effectiveness.
Generational planning is a proactive approach to preserving and growing wealth for the benefit of future generations. By embracing open communication, establishing a written strategy, and utilizing appropriate financial tools such as whole life insurance, families can overcome the challenges of wealth dissipation and create a lasting legacy that transcends generations.
Remember, building generational wealth is a journey, not a destination. By taking these steps and adapting the plan as circumstances evolve, families can ensure that their wealth serves as a foundation for future generations to build upon, fostering prosperity and well-being for years to come.
Frequently Asked Questions
1. What are some additional strategies for preserving wealth across generations?
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Investing in education: Providing opportunities for future generations to acquire knowledge and skills that will enhance their earning potential and financial literacy.
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Establishing a family business: Creating a sustainable business that can be passed down through generations, providing employment and income opportunities for family members.
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Philanthropic giving: Instilling the importance of giving back to the community and supporting causes that align with the family’s values.
2. How can I find qualified professionals to assist with generational planning?
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Financial advisors: Seek advisors who specialize in wealth management and have experience working with families on generational planning.
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Estate planning attorneys: Consult attorneys who can help draft legal documents, such as trusts and wills, that align with your generational plan.
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Insurance specialists: Work with insurance professionals who understand the nuances of whole life insurance and its role in generational planning.
3. What are some resources for learning more about generational planning?
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Books: “The Legacy Family: A Guide to Building a Lasting Legacy” by David M. Kelly and “Generational Wealth: How to Pass Your Money on to Your Children and Grandchildren” by James E. Hughes.
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Websites: The Family Legacy Institute (https://familylegacyinstitute.com/) and The American College of Trust and Estate Counsel (https://www.actec.org/).
By actively engaging in generational planning and seeking guidance from qualified professionals, families can take control of their financial future and create a legacy that will benefit generations to come.
Four key questions to ask yourself now
Our goals-based advice framework, which we use to manage wealth, discusses buckets for legacy, liquidity, lifestyle, and perpetual growth. Unlike the others, the “perpetual growth bucket” serves a special purpose because you do not want its assets to be depleted during your lifetime or the lives of your heirs.
First, we advise you to fund your lifestyle and liquidity “buckets,” which you will need throughout your lifetime. Next, you need to determine if you want to set aside some assets for the future generation to use or create a separate “legacy bucket.”
After that, you can focus on “growing your forever money.” We advise you to ask yourself four important questions before making any firm plans because they will help ensure their success:
- Purpose—What do you want the wealth to be used for?
- Stewards: Who will be in charge of possessing and looking after the assets after you pass away?
- Form—How will the assets be held?
- Horizon—How long do you want these assets to grow?
How to find the answers that are right for you
Answering these questions is a process. Your best ideas can be immediately scribbled down, then updated and revised as your vision grows, your situation changes, and you consult with loved ones and reliable advisors. Your J. P. The Morgan team can assist you in making decisions by providing best practices and our observations of what other clients have done in similar situations and their motivations.
Maybe your main priority is for your riches to provide opportunities or a safety net for generations to come. Perhaps you would like to establish a long-lasting family business that offers employment opportunities to your descendants and the community. Some wealthy people also wish to protect the environment, improve community services, or further medical research.
Perpetual wealth allows you to shape the futures of the people you love and everything you’ve built, no matter what your vision may be. Including your family in these conversations will promote a common family goal and vision for the wealth This will increase the possibility that your plans for continuous growth will be successful in the long run.
Additionally, you should determine who will be in charge of the assets in the long run. Could your family benefit more from hiring professionals to handle your wealth management needs, or do you have family members who can carry out your vision?
A co-stewardship arrangement, which combines professional and family management, is the choice made by many families. However, we advise you to think about how you might involve family members in fulfilling this duty whenever you designate them as stewards of your family. According to research, people typically behave and feel differently about money they have earned than money they have been given.
It is advisable to contemplate the mechanisms that can be established to enable the efficient cooperation of family stewards. How are family members staying involved, especially if outside stewards are managing the wealth? How are they coming to an agreement on risk? Research indicates that as wealth levels rise, people’s willingness to take risks declines, so how will the family intentionally take risks to achieve the wealth’s intended purpose?
However, we advise you to consult with your family to see if they support your vision and will work with you to make it a reality before making a final decision.
Do you want the current form of your assets to stay that way forever? Do you want to keep your family business running? Do you want to continue focusing on real estate in general or specific properties in particular?
And do you see that form changing over time? If so, under what circumstances? Take into account factors like the investment climate, consumer demand, or the absence of family members who are willing or able to manage the business.
For what length of time do you want these assets to grow? Is it really forever, or are there natural decision points (generational transitions, for example) where your family may benefit more from taking a different route?
Additionally, keep in mind that some wealthy individuals desire that their beneficiaries eventually assume full control and are free to alter the wealth’s purpose in accordance with their own principles or preferences.