Multigenerational wealth planning: A guide to do’s and don’ts

Estate planning should be done when you have acquired assets that you don’t want to default to state law distribution rules and the public probate process. More specifically, multigenerational wealth planning should be implemented to carry out your goals for multiple future generations in a manner that protects your assets, provides for your family, and reduces estate and income taxes.

Given that assets, tax policy, and family dynamics commonly change over time, adhering to the following do’s and don’ts can help you account for such changes and provide flexibility within the plan. 

Do

1.     Plan for yourself before you plan for others. Take inventory of your assets and income, and plan for your needs first. You and your spouse should enjoy the ability to live comfortably. Then, thoughtfully process whom you believe would be the best beneficiary of each of the assets that may be in excess of or remain from you and your spouse’s lifetime needs. Make sure to remember digital and intangible assets and any debt associated with an asset or your estate.

2.     Focus on goals first. There are several different planning strategies available. Focus first on your goals that prioritize your family and charitable intentions. Then, your advisors may better tailor a plan to achieve your goals with the added benefit of tax savings.

3.     Start early. The estate and gift tax exemption is scheduled to be reduced in 2026. The exemption allows for each individual to gift during their lifetime or hold in their estate an inflation-adjusted amount tax-free. For 2022, that amount is $12,060,000; but it will be cut in about half on January 1, 2026.

In addition, each year an individual may gift to another individual up to $16,000 without it going against the exemption amount. Taking advantage of higher exemption levels and additional years of annual exclusion gifting now creates large tax savings and increased wealth preservation for your family.

Because of this, top tax, legal and valuation firms are already seeing professional capacity constraints to complete implementation of complex planning designs. Waiting may prevent sufficient professional resources to carry out the most effective estate planning options to achieve your family goals.

4.     Plan for estate tax liquidity. Think through which assets may be needed to pay any estate tax liability and if the remaining distribution is still balanced among beneficiaries in a manner that demonstrates your overall intent. Keep in mind your family structure and dynamics and any charitable intent.

5.     Communicate. Work to instill in your family a continuation of your lifetime beliefs that you incorporate into your plan, and try to set them up for success. This communication gives your heirs an understanding of your intent behind your estate plan, an increased ability to strive to have them grow your initiatives in their unique way, and may reduce any potential family discord.

6.     Carefully consider trustees. Trustee duties usually include substantial tax and legal implications and require distribution decisions. Some individuals may not hold the skill set or the desire to be in charge of these responsibilities.

Individual trustees should be selectively appointed to ensure they are able and willing to carry out your intentions in a manner that is consistent with trust tax and legal requirements. If a corporate trustee is appointed, the firm should be reviewed based on their asset holdings, industry knowledge, and fee competitiveness. 

Don't

1.     Don't be pressured. While communication is an important step of the process and you may consider the viewpoints of other family members, make sure that the ultimate distribution decisions reflect your beliefs for what is in the best interests of your family. Don’t be pressured to change distribution provisions for your assets based on what others want.

2.     Don't copy friends and family. Your plan should be specific to you. Don’t assume that your estate plan should look like your friends’ and family’s plans. Everyone’s circumstances are different, and your advisors will help guide you based on your particular goals, assets and family.

3.     Don't procrastinate. Don’t let the required thoughtfulness of planning prevent you from implementing your estate plan, or it may cost your family significantly, either through taxes or discord during estate administration due to the uncertainty of your wishes.

Once you start the process, the relief of knowing that your family will know your wishes and that your plan will be upheld will significantly outweigh the initial work to establish your estate plan. When a plan is in place, maintenance is usually limited to compliance and periodic updates due to tax or family changes.