Accumulating wealth and protecting wealth are two very different things.
Research shows that it takes just two generations for a family to lose 70% of its net worth. By the third generation – it hits 90%. Protecting the inheritance of future generations requires proactive estate planning, an experienced attorney, and investments that can stand the test of time.
There are numerous types of trusts that can be set up to establish some controls on the assets you currently have. The estate plan can set rules for how and when assets are distributed, protect the family wealth from lawsuits, minimize tax liability and avoid probate.
A trust can even minimize the risk of an ex-spouse trying to make claims on the family fortune during a divorce. If you can envision a negative scenario, a trust can be written to circumvent it.
But once beneficiaries have the money, how can you protect the inheritance you expected to support the next generation?
Have the Difficult Conversation
Talking about money is frequently discouraged as being impolite. When it comes to protecting your family assets, forget polite and go with smart. Talk with your family about your worth, your estate plan and the protections you’ve put in place.
Answer questions – don’t fudge on the hard stuff – it will just make for legal challenges later on.
This is also your chance to provide guidance on how to protect – and even grow – the next generation’s inheritance.
Strategies for Protecting Multi-Generational Wealth
Good Intentions are no substitute for a financial advisor and tax attorney. Wealth management isn’t for the uninformed or irresponsible. It can vanish in a generation.
1. Pre-Nuptial Agreements
This is another uncomfortable conservation that needs to be had before marriage. Depending on the laws in your state, common-law relationships may also have to be factored in.
When you or your family are wealthy, and you intend to marry, talk with an attorney about legal protections for assets. Also, review the documents in the estate plan and any trusts. Divorce can significantly reduce the family’s net worth.
If there are provisions in your prenup that can render it null and void – know the risk you’re taking. If you’re smart, you’ll avoid them.
2. Splurge Smart
Obviously one of the pleasures of having money is acquiring things you want. There’s nothing wrong with that. But too often people who come into large sums of money lose sight of reality. The quickest way to lose wealth is to assume you can keep taking money out without putting in.
If you’re going to splurge, splurge smart. Instead of buying expensive toys that depreciate, invest in collectibles – classic cars, art, livestock or antique coins. The more exclusive your purchase – say a guitar used by John Lennon – the more value it has.
Granted you’ll spend some serious money to get it – but chances are good the resale value will go up before you get it home.
3. Purchase Exclusive Real Estate
This is the same concept, except for acquiring properties. These properties have additional value the land or buildings because of their unique nature. Exclusive real estate may have historical value or be associated with a specific person or event.
Examples might include the home or estate of a former President or a cottage where Ernest Hemingway wrote his books. Exclusive real estate is highly competitive – the supply is low, and the demand is high. Often estates control the properties and pass them from generation to generation.
However, as long as the property is maintained after purchase, the ROI is typically high.
Stocks, bonds, commodities and other financial services are obvious investment options, but they aren’t without risk. Consider the market to be part of your long-term goals because fluctuations can be devastating to the short term.
There are multiple factors for long-term wins that mitigate risk without impeding financial growth. Diversification in your portfolio and the balance between assets – how much in stock vs. bonds – are two risk mitigation strategies that work hand in hand.
Dollar-cost averaging is another technique to manage fluctuations and smooth out short-term dips and gains. There are two simple rules to market investments – set long-term goals for financial gain and stay in the game long enough to achieve them.
5. Venture Capitalism
A venture capitalist invests in start-ups, and in return has equity in the company. Venture capitalists can invest on their own or as a part of VC firm. Should the start-up take off, an investor can sell their stake at any time, typically for a high return.
If an IPO is planned, the ROI may climb even higher once the company goes public – an innovative company can deliver huge returns. As long as you have a big enough bankroll to get started and a high tolerance for risk, becoming a VC can be very satisfying on multiple levels. It’s chance to give back, to engage with innovative companies and to some extent mentor the next generation of entrepreneurs.
The risk is the key issue – if the start-up fails, chances are good you won’t recoup your investment. Even with an IPO, there’s no guarantee that the stock will meet your expectations.
6. Reduce Debt
This may not sound quite as sexy, but it’s sound wealth management practice to evaluate the benefits of using money for investment versus paying down debt.
Very simplistically, it comes down to whether your debt is costing you more than you could reasonably expect to gain from investing that money. Both are evaluated in after tax dollars.
By reducing your debt, you free up the money you’re paying out for investments that appreciate in value. But some debt may be helpful from a tax perspective – it’s important to stay on any changes in the tax code.
7. Too Good to Be True
The wealthy are not immune to grifters and scammers. This particularly true for the elderly, unstable or unhappy. They’re prime targets for people who make a living preying on other people.
When those people find a way into your finances – it can be devastating. They sell collectibles without proper provenance. Investment opportunities “guaranteeing” huge out payouts. Properties you’ve never seen except in brochures.
It costs less than $100 to throw up a website and print some business cards. Don’t settle for a Google search. Scammers are dedicated to their craft and work hard at it.
Do your due diligence and if it sounds too good to be true – it probably is.
Pay Attention – It’s Your Money
As complicated as wealth management can be, heirs need to have a handle on their finances. Otherwise don’t be surprised if a CPA strolls away with millions.
Many people who inherit money tend to let other people manage it. There’s nothing wrong with expert guidance, but you might want to rethink this idea of just handing the keys to the kingdom over to other people. There has to be an oversight.
To protect your family’s assets, you don’t have to become an accountant, but you do need to be able to recognize a red flag. Start with the estate lawyer and walk through how everything was set up and why. Find out what control you have over any trusts and portfolios.
Keep track of some basics – fees, expenses, actual versus goals. As mentioned earlier, changes in the tax code could have a significant effect on your money. Always, always, always vet the professionals you work with – talk to other clients, check board certifications.
Protect the Next Generation
This is not to imply you should distrust qualified professionals. It’s more about personal responsibility. Ask yourself one question: If someone was stealing from you – would you know it?
There are a couple of abnormalities that might indicate something strange is going on. Investments that pay out the same amount every month or that consistently perform above the norm in a bull or bear market.
Make sure you understand too how much you’re spending to have your assets managed. The fees are sprinkled in a swath of paperwork and legalese – the Securities and Exchange Commission requires it. Ask and don’t stop asking until you get an answer.
Get checks and balances in place. Make sure different people manage different pieces of the financial process. Take advantage of technology. Get alerts on your phone, notifications on your accounts. There are all kinds of ways to stay in front of fraud or theft.
This may sound obvious but cross-check your statements. If you’re not sure which numbers are related, sit down with a financial professional outside your current team. Ask him or her to help you pick up on changes in numbers or relationships between accounts that might be questionable.
Meet with people on a regular basis. Email and texts are great, but in person, meetings go a long way to building trust or raising red flags. This isn’t about being paranoid – it’s about being accountable for the assets your family accumulated and protected for you to have an inheritance.
Now it’s your turn to do the same.