James' World 2

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You’ve worked hard and spent decades building something significant, and, naturally, you want it to have a lasting impact for your family.

Earning, saving, and investing have been your focus over the years, and you’ve probably also taken most or all of the typical estate planning steps.

Last year at Catalyst Advisory, we surveyed 1,000 American adults and found that 90% hope to have something to leave behind for future generations. It’s clear that legacy matters to most of us.

Unfortunately, 70% of wealthy families lose that wealth by the second generation, and 90% of it by the third. Those who successfully maintain family wealth are in the minority.

The myth: ‘A good estate plan is enough.’

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As a wealth transfer adviser, my work is all about helping families protect and preserve their wealth. And before I started my firm, I spent seven years in a family office role, working with ultra-wealthy families.

If you have a will, life insurance, beneficiary designations, and an asset inventory, and followed other typical estate planning advice, you might feel like you’re all set. But families who successfully preserve their wealth do a few specific things most people never consider.

Three things families that preserve their wealth do differently

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While these lessons were learned by observing ultra-wealthy families, you don’t need a massive fortune to apply these principles. Families with much more modest wealth will also benefit by taking these proactive steps.

1. They write a family constitution

A family constitution is a living document that defines the family’s shared values, the purpose of the wealth, and guidelines for how future generations should steward that wealth. It is not a legal document and doesn’t replace a will or trust.

There’s nothing legally binding about a family constitution, and yet it’s incredibly effective for alignment. Without a shared understanding of why the wealth exists, heirs often default to spending it or using it in ways the previous generation wouldn’t have wanted.

Family constitutions usually include a family mission statement, clear expectations about work ethic, guidelines for decision-making and an overview of succession principles.

Since it’s an unofficial document, the family constitution can include whatever is important to you, such as philanthropy and guiding principles for giving.

Creating the family constitution is the first step, but it’s not a document that you create once and file away for your heirs to read after you’re gone. For it to be effective, the family constitution should be a living document that’s reviewed, discussed, and updated if necessary.

Get your kids or heirs involved as early as possible to increase buy-in. Many families have occasional meetings to discuss their values and go over the details covered in the family constitution. The more the next generation is involved in the process, the more effective it will be

2. They play defense before offense

When it comes to retirement planning and building a portfolio, investing and growth are usually the focus. High returns are the goal.

But families who successfully preserve their wealth typically spend more time and energy on tax strategy and protecting their wealth than selecting the right investments. It’s a completely different mindset.

In estate planning, what you pass on is far more important than what you accumulate. Taxes at death, capital gains on inherited assets, and estate settlement costs can quickly gut a family’s wealth before the heirs ever see it.

Here are a few strategies that benefit many families.

Irrevocable trusts. When structured properly, irrevocable trusts remove assets from your taxable estate, meaning your heirs will receive more. The trade-off is that you give up some control.

They’re not right for everyone, but irrevocable trusts can be effective if you hold illiquid assets or if your portfolio will grow quickly (so the future growth occurs outside of the estate).

Life insurance as a wealth transfer tool. Life insurance can offer much more than just a death benefit. A permanent life policy held in an irrevocable life insurance trust (ILIT) can give your heirs a tax-free lump sum outside of your estate. It provides excellent liquidity so your heirs can pay taxes without selling assets (very important if you own a business or a real estate portfolio).

Harvest tax advantages while you’re alive. Annual gifting within exclusion limits, Roth conversions during lower-income years and charitable remainder trusts can significantly reduce your taxable estate over time.

These efforts typically compound, so the more attention you give them now, the more money your heirs will have later.

3. They consolidate rather than divide

Estate planning typically involves splitting everything evenly among the heirs, so they can do with their inheritance as they please. While that seems fair, it actually may not be in their best interest.

Dividing assets, especially illiquid ones like real estate and businesses, often forces a sale. Fire sales usually result in family conflict and erosion of the estate.

Families who successfully preserve generational wealth often use structures designed to keep the capital in one place. This may involve a family LLC, a trust, or shared governance of family assets. Heirs can benefit equally from a pool of assets without dividing and splitting everything apart, which often results in lost value.

The legacy isn’t the money

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Families who preserve generational wealth aren’t successful because they have more to begin with. They maintain their wealth because of their intentional approach. You don’t need tens or hundreds of millions of dollars to benefit from the same mindset and actions.

Family constitutions, a defensive-oriented mindset, and consolidated structures aren’t just for the ultra-wealthy. You may have never considered these strategies, but they could make a difference that lasts for generations.

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