Ambassador Advisors’ unique perspective on finances is rooted in our value of Biblical stewardship. We believe everything we have is from the Lord, and—contrary to contemporary wisdom—we are only temporary caretakers of resources He’s entrusted to us. Paul wrote in 1 Corinthians 2:14, “The person without the Spirit does not accept the things that come from the Spirit of God but considers them foolishness, and cannot understand them because they are discerned only through the Spirit.” In the area of financial wisdom, this is frequently true. For many advisors, success is found in helping clients keep and accumulate more financial resources. In contrast, our goal is to help clients best follow whatever call the Lord has laid on their heart for the money and possessions He’s entrusted to their care. Biblical stewardship calls us to hold everything we own with an open hand, willing and ready to follow the Lord’s call for its use. Here are some helpful thoughts on stewarding and protecting wealth, so that future generations can continue your legacy of generosity.
This article was originally published on wealthmanagement.com. Reprinted with permission.
Many families desire to perpetuate their family’s wealth for the benefit of future generations. Typically, their first action is to engage a top-notch estate-planning attorney and update estate and gift plans.
While tax planning for generational wealth transfer is essential, current and next generation family plans need to be developed. The plans should be designed to meet both the donor and beneficiaries’ needs. They also should address family investment and risk management policies, future wealth creation strategies and spending/distribution protocols. Once these plans are agreed on, family leadership should prepare a multiyear financial plan, computed in real dollars, to determine implementation feasibility.
A plan requires regular updating to adjust for changes in the family’s wealth portfolio, tax laws, and current and future beneficiary needs. In addition, families increase in size over time, which may impact distribution plans per family unit. Best practice is to develop the plan so each family beneficiary understands what share of distributions will be received in the future, so expectations don’t get out of whack or result in problematic family dynamics.
The Hard Economics
There are four headwinds that systematically erode family wealth. They can be remembered by my acronym, FIST: family, inflation, spending, taxes.
Perpetuation of Family Wealth Headwinds
FIST often shocks families of wealth when they’re confronted with the financial impact of these four elements. Even though the concepts are easy to understand, the degree of their collective consumption on a family’s wealth is staggering.
Number of family members. The concept is simple. Gen 1, representing one family unit, has two children, creating two additional family units. Gen 2 has two children each, creating four more family units in Gen 3. From Gen 1 to Gen 3, there would be an increase from one to four family units participating in the family’s wealth. This is without considering the fact that many families support two or more generations today.
Inflation. Inflation’s compounding feature over time significantly erodes a family’s real wealth—that is, wealth measured in real dollars. It’s rightly deemed the “silent killer” because inflation has significant impact but isn’t quantified and reported in investment statements.
Spending. Spending is determined by the amount of a family’s wealth distributed to the family stakeholders each year. It should be evaluated as a percentage of investable assets. Spending policies can be difficult to gain consensus on among family members because individuals often have sharply divergent financial circumstances and needs.
Taxation. The biggest spending partner in a family is probably Uncle Sam. It’s common, particularly for California and other high-tax states, to see 40% of investment income consumed by taxes.
The FIST Knockout Punch
The following illustrates the impact of FIST on multigenerational wealth. While simple to communicate and understand, it shows a recurring elimination of family wealth.
Wealth Perpetuation Illustration*
Element of Investment
*Excludes any reduction in wealth portfolio due to estate and gift taxes.
At a 3% spend rate, the family’s real dollar wealth portfolio doesn’t retain its value, decreasing every year by approximately 1.75%. Coupled with an expanding family, the future impact on available spending in real dollars per family unit is devastating.
Six Mitigation Strategies
There are six important strategies that can help mitigate the depletion of family wealth for future generations that you should discuss with your advisor:
Adopting the above strategies and developing next generation wealth creators is your best approach to perpetuating multigenerational family wealth.
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