Beyond the Red Envelope: Multi-Generational Wealth Transfer Strategies
Lunar New Year is a cause for celebration in many Asian cultures around the world. One of the most beloved traditions associated with this festive period is the practice of giving red envelopes, known as hongbao, which are filled with money as a symbol of good luck and well-wishes for the new year ahead. The practice of giving hongbao can be traced back to about 202 BC – 220 AD in the Han Dynasty. The tradition of giving hongbao typically falls to parents or grandparents, who offer them to their younger generations as a symbol of love, longevity, and protection from misfortune. These monetary tokens are believed to bring good luck and health over the coming year—qualities that are highly valued by families striving for prosperity across multiple generations. While this time-honored tradition dates back centuries, these red packets remain popular today. And it makes sense. After all, we all want the best for our future generations.
The Lunar New Year got us thinking about multi-generational families and how they can reap the benefits of passing wealth on to the next generation. Creating the right strategy, however, for passing wealth between branches of a family tree can be complicated. Let's take a closer look.
Introduction to Multi-Generational Wealth Transfers
At its core, a multi-generational wealth transfer involves passing along assets from one generation to another. While many view a wealth transfer happening only at the death of a loved one through an inheritance, others want to impact the lives of their loved ones during their lifetime. In addition, families who are thinking about generational wealth often want to see their family’s wealth not only continue but endure in a manner that benefits the family for many generations. As a result, it is important to work with a team of collaborative professionals who understand your family’s unique goals and objectives and work together to maximize your family’s wealth for generations to come. These teams often include a financial advisor, a tax professional, and an estate attorney.
Strategies for Multi-Generational Wealth Transfers
Every family is unique and passing wealth from one generation to the next is a complex process that requires careful planning to ensure that assets are transferred to future generations in a financially sound manner. An important first step to doing so is to create a comprehensive estate plan, which includes a will, a living trust, and a durable power of attorney. A last will and testament can ensure that your assets are distributed according to your wishes, and a trust can hold assets for multiple generations aiding in the minimization of estate taxes, as well as the ability to bypass a costly probate process. As laws and your circumstances change, it is important that you review and update your estate plan to confirm that it still reflects your wishes and goals.
The process of creating your estate plan can also provide an opportunity for families to educate the younger generation about aligning their finances with their philanthropic goals. Establishing a donor-advised fund (DAF) can be a smart and efficient way to doing so. A DAF is an investment account that is set up for charitable giving purposes that provides a triple tax benefit of a tax deduction on the contribution amount subject to 30% of AGI, and tax-free growth and distributions. As a result, it is usually funded with highly appreciated shares of stocks. It is important to note that a DAF is an irrevocable gift, so once a contribution is made the funds can only be used for gifting to IRS qualified charities. The DAF also provides great flexibility for the family in that they can make grants to eligible nonprofits all at once or over time as the family’s values and passions may change in the future. Since the funds in a DAF can be invested and grow tax free the family can even review the investments together with their advisor.
If you’re interested in distributing wealth directly to your heirs, gifting is another strategy to consider. In 2023, the annual gift tax exclusion allows you to gift up to $17,000 per person per year without triggering gift taxes. Married couples can gift twice that amount up to $34,000 annually per recipient. However, there are lifetime limits to be aware of. The Tax Cut and Jobs Act raised the lifetime estate and gift tax exemption to $12.92 million in 2023 but it is scheduled to be reduced to $6 million starting in 2026. Implementing a planned gifting strategy now can help play a key role in minimizing estate taxes and funding important generational milestones such as saving for college.
We discussed three ways that you can plan to transfer wealth to the next generation but there are many more complex strategies such as using a charitable remainder trust (CRT) or a grantor retained annuity trust (GRAT), which we will cover in future articles. Planning for generational wealth transfers can be a complex process that requires careful consideration of various unique family dynamics and financial factors. Accordingly, it is important to seek professional advice to help you find the right strategy for your family. At Quantum Financial Advisors, we collaborate with you and your estate planning attorney and CPA to ensure that your wealth is preserved and passed on to future generations in a financially sound manner according to your wishes.
DISCLOSURE: Quantum Financial Advisors, LLC is an SEC registered investment adviser. SEC registration does not constitute an endorsement of Quantum Financial Advisors, LLC by the SEC nor does it indicate that Quantum Financial Advisors, LLC has attained a particular level of skill or ability. This material prepared by Quantum Financial Advisors, LLC is for informational purposes only and is accurate as of the date it was prepared. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Advisory services are only offered to clients or prospective clients where Quantum Financial Advisors, LLC and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Quantum Financial Advisors, LLC unless a client service agreement is in place. This material is not intended to serve as personalized tax, legal, and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Quantum Financial Advisors, LLC is not an accounting or legal firm. Please consult with your tax and/or legal professional regarding your specific tax and/or legal situation when determining if any of the mentioned strategies are right for you.
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