5 Pitfalls in Transferring Wealth to the Next Generation
After saving and growing your wealth throughout your life, you want to be able to pass on your assets to your children and grandchildren. Yet with an incomplete estate plan, a generation wealth transfer can become complex, and even litigious. Instead, you want to plan ahead to simplify transferring wealth from one generation to the next.
Whether you want to pass on assets like real estate or more sentimental heirlooms, estate planning can help your family members quickly complete a generation wealth transfer. Yet if you don’t plan ahead, the following five pitfalls can create roadblocks to your wealth transfer plan:
1. Leaving Assets Out of Your Estate Plan
If you don’t specify how certain assets should be divided up among your family members, you could complicate your wealth transfer plan, and fighting among family members may break out.
For example, you may specify how you want to divide your cash savings among your children, but you might forget to specify how to divide physical assets ranging from cars to family heirlooms. In your will or living trust, clarify how you want to pass on all your assets, especially ones that might have sentimental value and could be difficult for family members to fairly split up on their own.
2. Not Updating Beneficiaries
Certain assets such as retirement accounts can be transferred to the next generation by designating beneficiaries. However, you should make sure your beneficiaries remain up to date.
For example, if you’ve expanded your family, went through a divorce, a family member passed, or other changes occurred, the people listed as your beneficiaries might no longer be the ones you want to include in your estate planning strategy. Updating your beneficiaries helps with transferring wealth to your intended recipients.
3. Letting Assets Get Held Up in Probate Court
With a standard will, your estate has to go through probate court to ensure your assets are properly passed on according to your wealth transfer plan. Yet the probate process can be lengthy, particularly if your will is ambiguous or other issues arise, such as a legal challenge by a family member.
If you think your will might get held up in probate court, you might be better off setting up a living trust. Doing so involves transferring wealth to a trust during your lifetime, and the dispersal process does not have to include going through probate court.
Make sure to talk to your estate planning attorney and financial advisor about which option is better for you, based on your financial situation, the state in which you live, and your legacy wishes.
4. Ignoring Taxes
Depending on your level of family wealth and goals, you might want to use estate planning strategies that minimize estate taxes. As of 2020, married couples can transfer over $23 million during and after their lives without being subject to the gift and estate tax. Though this number is high enough that most Americans do not have to worry about it, tax laws change. In years past, the gift and estate tax has been much less—something to keep in mind.
Strategies like putting assets into an irrevocable living trust can help manage taxes. An irrevocable living trust means you can’t make changes to the trust, but after you pass, that money can be passed on to your heirs without being subject to estate taxes. Again, talk with your attorney and financial planner about whether this option would benefit you.
5. Not Discussing Your Wealth Transfer Plan with Family
Passing wealth to family members can be simplified by discussing generation wealth transfers in advance. Rather than, say, your children arguing after your pass about who should receive certain assets, you can calmly discuss your wishes with your family far in advance.
That way, instead of fighting during an emotional time, your family can plan a fair, reasonable process for passing wealth from one generation to the next. You can also decide as a family how you may want to use your wealth in other ways, such as setting aside part of your estate for charitable contributions.
Our Roseville, CA financial planning firm discusses inheritance and legacy wishes with clients as part of our comprehensive financial advice. We believe that taking the time to review an estate plan can help people avoid these and other pitfalls.
By updating your wealth transfer plan, discussing key issues with your family members, and preparing legal documents in advance, you can help simplify transferring wealth. You can then enjoy retirement, knowing your family members are in a good position to eventually receive your assets, and the wealth transfer process can be less stressful for them.
Schedule a complimentary, 15-minute call with a fee-only financial advisor today to discuss your personal situation.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor serving the greater Sacramento area with an office in Roseville, CA. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country's leading professional association of fee-only financial advisors.