There is a substantial amount of planning that goes into managing your assets. You must distribute these assets according to your wishes and keep them out of the government’s hands. In this article, let’s discuss four strategies to help affluent families protect their wealth.
- A Multi-Generational Approach To Asset Allocation
As you get older, you must reduce your portfolio risk. This strategy can help minimize the chance you will experience as you get older. One of the main reasons why many people do this is because their investment time horizon is shorter. We often use various strategies to target a lower correlation with the market.
An affluent family’s investment time horizon is different from that of other people, as it depends on the generation of the family. With that in mind, a multi-generation approach to asset allocation can help manage your family’s wealth. It can be done by creating a strategy based on the family’s different needs, such as its tolerance for risk and liquidity.
A critical factor that an affluent family should consider when it comes to asset allocation is the type of accounts they have. For instance, if the family has a traditional retirement account, it should be invested in conservative funds. On the other hand, accounts that are geared toward future generations should be more aggressive.
- Maximize Gifting
An effective way to reduce your estate tax liability is strategically gifting. This can be done through the annual gift exclusion. For instance, if an individual gives a gift of up to $16,000 in 2022, they can give it to a recipient without filing a gift tax return. On the other hand, a married couple can give up to $32,000.
The annual gift exclusion is only for the recipient. For instance, if a married couple gives a gift of $32,000 in 2022, they can give it to as many recipients as they wish during the 2022 tax year.
The lifetime gift tax exemption limit has reached a historic high of $12.06 million for individual taxpayers and $24.12 million for married individuals filing jointly. However, this limit may not be around forever, as the legislation that increased it included a sunset clause. Unless new legislation is passed that makes this limit permanent, the cap on the amount that can be given to each individual will be reduced to $5 million starting on January 1, 2026.
You can take advantage of this high exemption limit and gift during your lifetime to reduce the taxable estate of your estate. This can also help minimize the burden on your heirs.
- Make A Philanthropic Strategy
A factor that an affluent family should consider when planning their wealth management strategy is philanthropy. If you plan on supporting charitable activities, then a donor-advised fund or a family foundation can help structure the giving process.
A donor-advised fund or a family foundation can help structure the giving process. A fund can be established with the help of various assets such as cash, securities, and other investments. You can also designate a successor advisor who will manage the fund at your passing. If you prefer to have the fund completely dissolved at your death, you can pre-select a 501(c)(3) organization that will receive a donation.
Unlike donor-advised funds, a family foundation can also help structure the giving process. It can give future generations of the family more control over the organization’s operations. Although a family foundation can only accept donations to 501(c)3 organizations, grant-making decisions are exclusively up to the foundation’s board.
- Research How Trusts Can Help
A trust can help protect the wealth you’ve built and ensure that most of it are passed down to the next generation.
A trust is a legal vehicle that can be established through a relationship between the asset owner and its trustee. Wealthy families can use it to protect their assets from estate taxes, ensure that most of the assets are passed down to the next generation, and avoid creditors. Other reasons why affluent families use trusts include:
- Protecting their assets from creditors.
- Preserving a charitable legacy.
- Preventing the need for a court order to distribute the assets.
If you haven’t already used a trust, you must consider making it a part of your estate planning process. It can help make the process easier for your heirs and ensure that most of your assets are passed down to the next generation.