Multigenerational financial planning

Multigenerational Planning Works!

| By Jayme Meredith

Many people don’t think about multigenerational planning. I think it goes back to the old “If you fail to plan, you plan to fail,” because even people who don’t think they have a substantial amount of wealth to pass to their children still need to think about the impact of that on their children.

Typical of people with wealth, there are potentially substantial changes to taxation and rules around inheritance that they need to be concerned about. Generally, though, everyone should take some time and plan for “What’s going to happen to my wealth when I die, how will that impact my heirs, and are there things that I can be doing now that can make it easier or less costly for my heirs?” These are important questions.

What 30 Years Has Taught Me

Children are often either very good with money or very bad with money. Some factors that are worth taking into consideration are your children’s spending habits, how might a spouse influence their financial situation, and whether they’ve established a clear career path.

If any of those things are possible, where your children can’t control their spending, you want to make sure that the money lasts as long as they do for their retirement. And that’s perhaps where you want to look into trusts. 

If you don’t care what happens, then maybe not a trust – but you still need to look at what assets are coming to them, whether IRA accounts, non-IRA accounts, impacts of changes in rules such as the SECURE Act and how it will change their taxation. 

Maybe it’s cheaper for you to take distributions from your IRA and pay a lower tax rate than your children would be if they are under the SECURE Act, and the rules, restrictions and requirements that go along with that.

The Family Meeting

The situations where things have worked out the best, by far, is with the family meeting. 

This is where you are able to get the children involved in some of the decision-making. You also get to understand their situation, how much they make, their tax situation, and some unique things in their lives that may be different from your other children’s. 

Parents are sometimes reluctant to do that – sometimes, for good reasons (and sometimes, for non-so good reasons) – but if a family meeting is not practical, or impossible, then it’s important to try to understand where the children are in life to your best guesses.

Once we have that, we map it all out. For instance, what if you die 5, 10, 15 years from now?

In each of those situations, what would life look like for your children? We would run the planning to forecast each scenario. We would then use all of our expertise, software, and knowledge to see if there are opportunities to improve upon that situation, based on current tax laws, rules and regulations. 

Is it better to leave children IRA assets, or is it better to convert those IRA assets to a life insurance policy? Is it better to be gifting some of those assets? And, again, is it better to leave assets in trust or leave assets outright? These, too, are important questions.

Sometimes, it might be better to consider “skipping” generation, and start considering leaving assets to generation two and, potentially, to generation three, maybe funding college savings accounts for the grandchildren or great grandchildren. That’s a great way to pass on wealth and bypass a lot of taxes.  

Remember, the very best family meeting is when everybody is involved, everybody trusts everybody, and everybody cooperates.  It’s most productive to gather the parents – generation one – with generation two and maybe three, the attorneys, the tax-preparers, and us. That way we talk about everybody’s situation.

It also works well if we’ve got a relationship with the children. If we do have a relationship with both generations (and even generation three) we can understand their situations acutely and make those recommendations.

This is especially beneficial for families that are a little more private and don’t want that family meeting. We can and do meet with the family individually, and we can understand their needs intimately, allowing us to make thoughtful recommendations to the parents to maximize their opportunity to pass on that wealth. That’s especially important if the son’s needs are different than the daughter’s needs, and not everybody wants to share that information. We can play the middleman to keep everything private.

What if Johnny Doesn’t Know About Janie?

We’re all human. Family members don’t always tell each other about very private things they’re struggling with. We’ve had those situations as well. Depending on the family dynamics, people might be reluctant to share “dirty laundry” that is embarrassing or uncomfortable, but may influence how assets should be passed to them. And so, it is all the more reason for us to have a solid relationship with individual family members to deal with it delicately. 

Sometimes generation one does not want to pass assets directly. Basically, we would recommend alternative means of providing wealth to those family members that have the potential to provide the income they need, and protect the principal from either bad things happening to them or making bad decisions themselves.

Divorce has also become a common consideration in the multigenerational planning process. It’s really important within the modern families where you have a second marriage and each spouse has children along their own bloodlines.

If there is a disproportion of wealth, like maybe one spouse has substantially more than the other, there is sometimes concern with folks who ask: “If I were to pass away, how do I provide for my spouse but allow my wealth to flow along my bloodlines? I want my house to go to my children. But if I die first, how do I compel my spouse to make sure it doesn’t go to their children?”

This is especially true in situations where they might not get along. 

Recently, I received an email about a grandmother’s passing, and her wealth being passed directly to her grandson. Despite all of our warnings about a house he couldn’t afford, and about going on vacations he couldn’t fund, he now faces bankruptcy. A family meeting that included the grandson, or at least his parents, could have provided the opportunity to identify these risks and allowed us to structure a more lasting legacy to his benefit.

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