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  • Writer's pictureYvonne Darby

Generational Wealth, Not Just for the Elite

When people hear the term generational wealth, they tend to exclude themselves from the conversation because it feels like something reserved for the 1%. However, we can be the ones that change that narrative for our families and begin to build a legacy of generational wealth. Regardless of your financial circumstances, we will all leave a legacy. Therefore, legacy planning is for everyone.

What is generational wealth?

Generational wealth refers to financial assets passed down by one generation of a family to the next. These assets can include cash, stocks, bonds, real estate, family businesses, automobiles, life insurance policies, family heirlooms, collectibles, etc. [i]

Why is generational wealth so important?

Generational wealth is one method of leaving a meaningful legacy. This foundation and financial buffer you’re creating for your loved ones can both save them from undue hardship and open up greater opportunities for them.

Planning ahead to ensure that your family is taken care of in your absence is one of the best ways that you can love them. This is the work that we are doing alongside our clients. Quarterbacking their finances, so that all their affairs are in order; granting them peace of mind and comfort knowing that their intended legacy and impact will be accomplished.

How can I start to build generational wealth?

Here are few things you can do now to start building generational wealth for your family.


1. Take advantage of your Retirement Accounts. Understanding your retirement benefits offered through your employer can help you take the most advantage of these savings tools. These accounts are often offered as either a 401(k) or a 403(b). These retirement saving vehicles can be the most tax efficient and cost-effective means of saving for the future. Most employers will cover the administrative costs and offer a match % to the contributions you’re making, which equals free money into your account. If your employer doesn’t offer a retirement savings account, you can open your own personal individual retirement account (IRA) to accomplish the same goal.


2. Invest in the Market. Over a long time horizon, putting away money in a simple savings account will not be enough. Inflation is likely to erode the impact and purchasing power of those funds. You want to be putting your money to work in a growth vehicle. Investing in the market allows you to partake in the power of compound interest. [ii] Compound interest is the multiplying effect of money growth when you are earning “interest on interest.” This accelerated growth cannot be accomplished through a bank checking or savings account that earns simple interest, which is only earned on the principal and doesn’t account for interest earned over time.


3. Purchase Life Insurance. Life Insurance can be a helpful safety tool in the unfortunate circumstance that you pass away unexpectedly before you’ve had the opportunity to create enough wealth to self-insure your family. This is especially important during a season of life where you have a spouse and/or dependents who rely on your income. If you already have life insurance in place, be sure to check that your beneficiaries are up to date. If you need help to understand if you have enough life insurance to protect your family, or are considering how much and for how long you might need coverage, we would be happy to do that analysis for you.



4. Create an Estate Plan. Estate planning is the process of establishing what will happen to your assets after you pass. Taking time to do this part well will help to minimize the fees and cost associated with your estate going through probate and optimize the generational wealth passed on to the next generation. [iii] You can read more about the details of probate in the article linked at the end of this section. State by state estate laws can vary, so it’s important to know what steps and documents are necessary to ensure that your estate is distributed according to your wishes. Although writing a will and ensuring that all your accounts have the appropriate beneficiaries may be sufficient, here’s 5 Reason to Have a Trust.

5. Consider the Tax Implications. There may be tax implications based on the amount of generational wealth you create and leave to your family. Sometimes this means that it may be more beneficial to gift them some assets during life rather than waiting until after death. It may also mean that it can be more advantageous for you to keep your assets under your name and gift them after death. Strategic tax planning can help you make sure that the generational wealth that you’ve created isn’t diminished through taxes. Here are a few examples of when gifting during life vs. gifting after death may be more tax efficient:

Gifting During Life

If you decide to gift during your lifetime, you can enjoy seeing the direct impact you are making in the lives of your family members.

Cash

In 2023, you can pass along $17,000 per person or $34,000 per couple, in money or property without incurring federal gift taxes.

Education

Tuition paid directly to the qualified educational institution is exempt from gift taxes. For other education expenses such as fees, books, computers, room and board (as long as the student is enrolled at least part-time), you may want to set up either a 529 or an ESA.

Medical [iv]

Eligible medical expenses that are paid directly to the provider are excluded from gift taxes.

Gifting After Death

Waiting to gift specific assets until after death can save your loved ones from a high tax bill. This ensures that more money is left in their hands to create more generational wealth and less goes to paying taxes.

Property

Allowing your beneficiaries to inherit property after death is sometimes more beneficial because of the step up in cost basis. [v] For example, if you bought a house for $100,000 and gifted it to your child while you’re still living; if they decide to sell the home now valued at $900,000, they will need to pay capital gains on the $800,000 difference. However, they inherit the property after your passing and the title is transferred into their name; their new cost basis would jump from the original $100,000 purchase price to $900,000. If they sold the home for $950,000, they would only pay taxes on $50,000 of capital gains. The tax savings are significant in this instance.

If you have a significant estate, bear in mind that the current gift and estate tax exemption limit of $12.06M per person is set to be cut in half in 2026. [iv] There are steps that you can take now to take advantage of the higher estate tax limit and reduce the impact of the law change later. We’d be happy to do a customized analysis of your estate to give you clarity on the impact that this legislation will have on your family.

How can I make sure I’m taking advantage of every opportunity to create generational wealth for my family?

These recommendations above are not a one size fits all solution, but should be considered in the greater context of a personalized comprehensive legacy plan. If you’re looking to understand which of these strategies are applicable for your own family’s generational wealth, we can start by building a complimentary comprehensive financial plan. Please don’t hesitate to reach out if that’s something that would be of value to you.

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Sherwood Financial Partners, LLC is a registered investment adviser. Sherwood Financial Partners, LLC may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. The information contained herein is not intended to convey or constitute legal or tax advice. Be sure to first consult with a qualified financial adviser, legal professional, and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance. Principal value and investment return will fluctuate. There are no implied guarantees or assurances that the target returns will be achieved or objectives will be met. Future returns may differ significantly from past returns due to many different factors. Investments involve risk and the possibility of loss of principal.

 

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