5 ways to protect intergenerational wealth

As we get older, we often find that our concern is not just our own retirement, but our surviving family. Our aspirations can grow to include children and grandchildren, and perhaps great grandchildren (if we’re lucky). However, we need to balance these aspirations with our retirement and end-of-life needs, especially as our costs rise, and our incomes diminish in our twilight years. Here are some steps you can take:

1. Always prioritise your retirement planning first
It may seem counterintuitive, but the best way to provide a strong legacy is to provide for yourself first. If you can’t build a sufficient retirement fund, there’s no way to also provide for generations afterward.

A good way to do this is to work out your required post-retirement income, such as with an Income Replacement Rate (IRR). You might, for instance, aim to build a portfolio with a 70% IRR (e.g., if you earn $8,000 a month right now, you would aim to have at least $5,600 per month when you retire). Setting goals like this help you to quantify a required retirement amount.

You can start planning for intergenerational wealth after reaching this goal; such as what property your children will inherit, or what sort of trusts you might create for them. Trying to build intergenerational wealth before this has a higher chance of failure, as you may need to liquidate assets you intended to leave behind (e.g., if you run out of retirement funds, you may need to sell the property you intended to leave to your children).

2. Ensure a smooth transfer of wealth, with trustworthy intermediaries
If you don’t leave behind a will, there is a risk that your legacy won’t be handed down as intended. It will instead be handed down according to intestate law. For example:

If you have a spouse and children, your children will get half your assets, and your spouse will get the other half. This will happen even if there are special circumstances, such as if your spouse has no means of support, but your children are doing well.

If you have only children surviving you, then your legacy will be equally divided between them. But to protect intergenerational wealth, you may require a different distribution of your legacy. You might want the child who is most financially savvy to inherit more complex assets, for example, while leaving simple inheritances like jewellry to those who dislike learning about stocks, bonds, real estate, etc.

A qualified financial expert, along with a law firm, can help you to set up a proper arrangement.

3. Use insurance to plan for end-of-life consequences, to maximise your legacy
Through effective use of life insurance, as well as safeguards such as mortgage insurance, you can minimise the financial effects of your passing.

Mortgage insurance, for example, pays off the entirety of your outstanding home loan when you pass away. This can prevent your beneficiaries from having to sell the property, or having to use life insurance proceeds to pay off housing loans.

Likewise, sufficient life insurance can help to close off any household debts, and provide temporary support when your income is lost. Some forms of life insurance can even increase your lifetime coverage as you age, and let you vary your premiums based on changing needs.

As your legacy and life goals may change however, try to plan these insurance policies with a financial representative who is focused on long-term relationships.

4. Instruct your family on the more sophisticated assets you’re leaving to them
Some assets are tougher to manage than others. For example, if your portfolio consists of stocks that are meant to be held, and some that are meant to be sold off, it’s best to explain this to your surviving family (lest they accidentally hold on to declining shares, or liquidate what’s meant to be for their long-term benefit!)

Assets such as real estate, intellectual property, or parts of the family business all tend to be more abstract. It’s best if your beneficiaries understand how these are meant to be held, rented, or sold for their benefit.

For highly specialised assets, such as art and collectibles, a law firm can be instructed to hire appropriate experts, if they’re to be sold for your family.

5. Where possible, instill good financial discipline from a young age
If your beneficiaries inherit a large sum through trusts, a will, or other such windfalls, there may be a temptation to squander it all at once. Hired experts, ranging from wealth managers to financial representatives, can sometimes mitigate the damage - but the best defence is early financial literacy.

Start your children off with basics like managing an allowance, and slowly introduce them to more advanced assets in your portfolio.

Book a complimentary financial planning session with our representatives below to find out more.