Creating a Lasting Legacy: Building a Multigenerational Wealth Transfer Plan for Families

Summary: Passing wealth down across generations is one of the most important and complex challenges that families face. In this article, Aprio thought leaders will guide you through essential steps to create a multigenerational wealth transfer plan that endures, adapts, and reflects your family’s values.

You have spent decades building your wealth to support your family and give back to the causes you care about. Over the years, you probably learned that creating a legacy is about more than just wealth and asset transfer. It’s a journey that can be fraught with many emotions and complicated family dynamics.

So, how do you properly manage all the personal complexities that come with legacy planning while making sure your wealth is positioned to grow? Below, we’ll explore how thoughtful strategy, careful governance, and comprehensive education can empower you and your family to create a legacy that transcends generations.

Define what multigenerational wealth transfer means for you

In the most practical sense, multigenerational wealth transfer is the process of moving your family assets. But it’s important to dig a bit deeper and work with a professional team to develop a tax-efficient, value-centric plan that is aligned with your intentions and considers the often-complex issues inherent in all multigenerational families.

There are several key principles you can use to guide yourself through this reflection process:

• Prioritize protection first: Your wealth strategy should be designed with the ultimate goal of protecting your assets, period. With the help of a sophisticated planning team, you can safeguard your wealth through appropriate vehicles before strategizing how you will grow and transfer them.
  
  
• Develop a strategic structure: Treat the wealth planning process like building a business. Start by establishing a clear vision, mission, and governance structure, and involve key family members early in the process (we’ll unpack this a bit more below).

Determine your vision, mission, and governance structure

Successful wealth transfer starts with intentional personal planning. Let’s look back at the business-building analogy we introduced above. When you start a business from the ground up, you develop your corporate mission and vision first; the same approach goes for wealth planning.

To start, define what your family stands for and what your family members hope to achieve with your wealth. Next, develop a governance structure that drives how you and your team will administer your wealth strategy. Governance may sound tedious, but it’s one of the most imperative steps in the wealth-planning process. Without a clear structure, families often see their wealth dissipate by the third or fourth generation.

With the help of an independent team (who can mediate tough conversations), set up frameworks for decision-making, conflict resolution, and ongoing management. These frameworks may include a family council, written documentation, and regular family meetings that foster proactive communication and keep your family members aligned.

Choose the right tax-efficient tools

For most high-net-worth families, tax efficiency is the cornerstone of effective wealth transfer and can make a major difference when it comes to future growth. It’s essential to choose tax-efficient vehicles that fit your family’s goals, the economic environment, and other circumstances that are specific to you and your family.

Most families use some combination of the following vehicles:

• Trusts: These include intentionally defective grantor trusts and other specialized structures that emphasize wealth protection and tax efficiency.
• Grantor Retained Annuity Trusts (GRATs): These tools are most useful in low interest-rate environments because they reduce the “hurdle rate” that the GRAT’s assets need to surpass to transfer wealth tax-free to your beneficiaries. 
• Foundations: Foundations are the best option for families whose mission and values are focused on charitable giving and philanthropic legacy building.
• Donor-Advised Funds: In situations where a foundation doesn’t make sense, some families will opt to use a donor-advised fund (DAF) to facilitate their charitable giving efforts while reducing their tax bill.
• Insurance Coverage: Many families use insurance strategies and policies as vehicles to manage risk, protect their assets, reduce their tax liabilities, and transfer their wealth across generations.

When it comes to choosing tax-efficient vehicles for wealth transfer, it’s important to avoid a one-size-fits-all approach. Again, the tools you choose must reflect your family’s unique objectives as well as thoughtful conversations you’ve had with your family around your shared values and intentions.

Don’t get hung up on common roadblocks

Depending on the size of your family and your interpersonal relationships with them, you may face a wide range of unique challenges around organization, communication, and emotional dynamics.

Common Challenges:

• Organization: Many families struggle with knowing what assets exist, where they are located, and who is entitled to them.
• Complex family structures: Intergenerational wealth transfer can become more complex in families with multiple marriages, children from different relationships, and jurisdictional issues.
• Intergenerational differences: Across generations, family members often have different values, risk tolerance thresholds, and financial objectives, which can sometimes trigger conflict.

Effective Solutions:

• Early inclusion: To prevent conflict and patch differences, you should be proactive in involving future generations in your wealth planning discussions as early as possible. Annual or quarterly family meetings are great forums to help promote healthy communication.
• Education: Encourage and create opportunities for your heirs to build financial literacy and confidence through real-world experiences and mentorship. Philanthropic and community organizations are great venues to achieve this.
• Written guidelines: Document your mission, values, goals, and expectations in a family charter to minimize misunderstandings.

Prepare the next generation

To create a lasting legacy, you need to prepare the next generation to manage wealth responsibly. Here are some simple yet effective strategies to help your heirs become dependable family stewards:

• Provide opportunities for hands-on management: Consider giving your younger family members the opportunity to manage a portion of the family wealth or your family foundation under supervision.
• Help build advisor relationships: Be sure to introduce your heirs to your tax professionals, attorneys, investment managers, and financial planners early on.
• Create age-appropriate education: You can start providing financial education early by tailoring programs and opportunities to the age and maturity level of each family member.

Address family-specific financial complexities

Outside of the typical components, you may have some specific challenges, milestones, or dynamics that you must account for in your wealth strategy. For instance, if you own a family business, then your strategy should include a succession plan that describes how you will transition ownership, especially if some of your heirs are involved in the business and others are not.

If you have family members with health or special needs requirements, or family members spread across different states, then you will have a host of other financial, tax, and compliance factors you will need to prep for. With thoughtful and proactive planning, you can address personal issues and wealth transfer concerns well before those needs arise.

Develop “legacy buckets”

Like most high-net-worth families, you may choose to allocate your wealth into several buckets to streamline the management process:

• Family: This includes direct wealth and asset transfers to your children, grandchildren, and other loved ones.
• Legacy and Community: You may choose to dedicate some of your wealth to charitable organizations or foundations geared toward supporting causes that reflect your family values.
• Special Projects: This bucket may include funding for art, collectibles, or other interests unique to you and your family.
• Business Transition: This includes planning for the sale or succession of your family business.

Keep in mind that each of these wealth buckets requires its own strategy, documentation, and oversight. Work closely with your professional advisory team to determine your own buckets and develop plans for allocating your wealth accordingly.

Remember: communication is key

As we mentioned above, your financial objectives and risk tolerance level may differ from your family members. For instance, in many families the older generation is more risk-averse, while younger heirs often seek growth and innovation. Regardless of how your personalities may differ, it’s possible to reach common ground by remembering the following:

• Facilitate open and honest dialogue: “Honest” is the key word here. It’s important to initiate in-depth discussions with your heirs about your family goals, financial picture, and investment strategies. And most importantly, make sure that all voices are heard.
• Adapt your investment portfolio: Accept that your heirs may have a different risk tolerance threshold than you do. Work with your advisory team and your heirs to align your assets and wealth management strategies with the objectives of each generation.

Final thoughts

You need to consider strategy, family values, and even psychology to create a multigenerational wealth transfer plan. By establishing clear governance, choosing tax-efficient tools, preparing your heirs, and addressing critical emotional dynamics, you can build a successful legacy that stands the test of time.

At Aprio, we partner with families like yours to develop successful wealth transfer plans that empower each generation to steward wealth wisely.