Traditional estate planning has showcased some huge weaknesses in the past few years. Wealth transfer from Baby Boomers to younger generations became much more difficult because of the process bottlenecks, and liberal policies throughout the past 30 years did not help anything at all.
Cohesive plan for wealth transfer is absolutely essential. The process begins with an education for future beneficiaries. Young children must learn the basics of budgeting. A few ideas for teaching children how to budget money include the following:
• Gift children a vacation allowance that must last for the entire trip instead of providing every need in real time.
• Give children a gift of a maximum Roth IRA contribution for the year. Challenge them to invest the money and beat the market if they choose not to place the money in the IRA.
• Give young children a mentor who will help them learn how to invest limited funds. No child should begin learning how to manage wealth at the point of inheritance.
The type of inheritance that will be passed down is also very important to consider. Depending on the personality and the talent of the beneficiary, there are many wealth vehicles that you may want to consider.
The Beneficiary Designation
Just having a will is not enough to properly transfer assets to a beneficiary, especially in the case of blended families. If you are using wealth vehicles such as IRAs, annuities, life insurance or other retirement plans, you should definitely have a beneficiary designation audit as a part of your procedure to transfer.
Accounts that do not have a right of survivorship cannot be designated by a will alone – they must be designated to the beneficiary specifically. It is also very important that the will and the beneficiary designation do not overlap or contradict each other. An attorney should draft a will in order to minimize the problems here.
Creating a Trust
Having a trust is one of the most effective ways of transferring wealth. It is also quite effective at preserving wealth before it is passed, making it an essential tool that everyone should know about.
Contrary to popular belief, you do not have to be a multimillionaire with a huge estate in order to use a trust. A trust simply means that wealth is handled by a private contract and administered through a fiduciary. This fiduciary will have a legal responsibility to behave in the best interests of the trust beneficiary.
A trust can contain very detailed instructions as well, making complex distribution plans much easier for a decedent with many beneficiaries.
Mentorship
Though you should be aware of the legal vehicles that you have for transferring wealth, the most important aspect of an efficient transfer will always be educating the beneficiary. It is always better to inform a beneficiary of the wealth that he or she will come into well before this actually occurs. Family psychologists agree almost in unison on this topic.
Having a financial mentor is an essential part of learning how to deal with wealth. Studies show that beneficiaries who have been informed on how wealth works are much less likely to argue when it is passed to them.
Mentorship should include family meetings of all generations to educate the heirs of their responsibilities. Outside financial professionals may also be included, especially if complex financial vehicles are to be used to transfer the wealth.
Long-Term Care
An often overlooked but very important aspect of transferring wealth is the responsibility of long-term care that the younger generation has to the elder. This is especially important for in vitro wealth transfers – transfers that occur before the elder generation dies.
In vitro wealth transfers are an effective tool to help maintain wealth as the elder generation loses its capacity to deal with the day-to-day aspects of managing a wealth portfolio. Because the younger generation has been properly educated, it may be able to take control of these assets in a responsible way without leaving the elder generation destitute.
As a matter of fact, a responsible education will actually leave the elder generation in a better situation, with less responsibility and more time to enjoy their golden years.
With financial laws becoming more draconian, it is very important to educate every member of the family about wealth transfers in order to maximize their efficiency. Ensure that all generations understand exactly what will happen with family money and exactly when it will happen for best results.
Regards,
Ethan Warrick
Editor
Wealth Authority
