Wealth Management

Intergenerational Financial Planning

Published by Bob Gustafson

Intergenerational Financial Planning

If you hope to protect assets and maximize wealth for future generations within your family, read on to learn about Intergenerational Financial Planning (IFP).

What is Intergenerational Financial Planning?

Intergenerational Financial Planning is a strategy that aims to integrate financial planning among generations. It’s where grandparents, parents, and children work together to maximize overall family wealth.

Families who are extremely wealthy (such as the Rockefellers and Kennedys) have traditionally been the types of families to use this strategy. Experts maintain IFP is one of the contributing factors to how these families have created dynasties. And guess what? The good news is that you don’t have to be wealthy to take advantage of this type of financial planning. So, conceptually it’s a great idea.

The bad news it’s not always easy or successful. In fact, 70% of intergenerational wealth transfers fail. And the reason? According to research by Roy Williams (The Williams Group) and his partner Vic Preisser, wealth often becomes a source of friction and dispute among family members.

Some families just don’t have the ability to get together and sit at the table and play nicely! Thus, in practice it can be difficult to do. However, it’s still worth looking into because the financial benefits can be substantial and long-lasting.

Benefits of IFP

Let’s say you are a parent with three children. You have $600,000 in an IRA that you’re going to pass along to them (i.e., $200,000 each). In this situation, there could be unintended tax consequences if one of the three children is independently wealthy on their own.

For the wealthy child, it may be more beneficial if you withdraw their $200,000 portion out of the IRA while you’re still alive. You’ll take a tax hit, but the large sum could bump your child into a higher tax bracket upon your death. So, to minimize the tax ramification, this strategy would prove beneficial.

Another example where IFP can be effective is if you bequeath money to a child who is married and whose marriage is on the rocks. Assuming there is no pre or postnuptial agreement covering inheritances, it’s possible that if a divorce occurs an ex-spouse may end up with half of the amount you bequeathed. IFP could help solve or minimize the effects of this type of situation if you plan for it.

In sum, the key to success is planning and being privy to specific details about each child’s financial situation. Planning involves communication. All family members need to have a seat at the table and be aware of what’s going on. They must understand and be comfortable with how the IFP strategy will affect their personal situations. Typically, when IFP isn’t successful, it’s due to lack of communication among the family members.

How trusts protect assets

Trusts have become popular due to today’s litigious society. Like IFP, specific types of trusts can work well to protect wealth. They are a great tool to protect assets when there’s a health condition, law suit, divorce and other situations. Trusts provide added layers of protection so potential risks don’t wipe out your heir’s money.

How to prepare your family

It’s great to prepare your assets for transfer through financial planning across generations. But to be successful, you also need to prepare your family. Once you have your estate plan created, take the following steps:

  • Call a family meeting to discuss the plan you have put together. Include your financial planner. They can moderate the conversation.
  • Get help from professionals that deal in these situations. In our experience, the folks that employ professionals for help are much more likely to succeed in this type of endeavor.
  • Review the goals of the plan so that your children understand the plan you have prepared and why
  • Define family members’ roles so they all feel involved.
  • Continue to refine family members’ roles to ensure that the plan is carried out.

Listen to our two discussions on intergenerational financial planning for more information:

As always, before you do anything, you should always consult with an expert. They can help you make the best decisions based on your personal situation. For more information, listen to our podcast: