Transferring Wealth to the Next Generation

Regardless of income, parents want to make sure they’re able to provide their children with a good life. Passing on wealth to the next generation is often a integral part of this. Fortunately, high-net-worth individuals have more options than most when it comes to wealth transfer planning.

However, it’s up to financial professionals to help their high-net-worth clients understand the different vehicles that can be used for wealth transfer. Some clients may believe that simply passing on cash to sons and daughters is a smart form of estate planning. However, research has shown that without the proper strategy, many inheritance plans flounder.

In an article published by WealthCounsel, Tim Voorhees stated that 60 percent of families lose their wealth by the end of the second generation. Meanwhile, by the end of the third generation, 90 percent of families are in the same boat. This leads to a 95 percent failure rate for traditional inheritance plans.

Investments like stocks can also be a risky strategy. With economic fluctuations leading to major declines in stock values in recent years, it’s no surprise that many individuals now view this type of investment with a wary eye. In fact, a recent Wells Fargo/Gallup survey found that 60 percent of all investors believe wariness regarding the stock market is wise. This wariness was even more pronounced when it came to long-term wealth building, as nearly 30 percent of investors said they consciously avoid stocks in long-term investment accounts.

“The fact that nearly seven out of 10 say they choose stocks for their long-term investing is a good strategy for growing assets over time, and yet it’s noteworthy that nearly a third actively choose to avoid stocks for long-term accounts,” said Wells Fargo Director of Retail Retirement Karen Wimbish.

Wimbish said it was clear that many investors had not forgotten the lessons they learned during the recession.

Yet the question remains: What is the best strategy for parents looking to pass on wealth to their loved ones?

Opting for stability

One valuable estate planning tool financial professionals can provide their clients comes in the form of life insurance.

Unlike other investments, life insurance can give individuals a solid asset they can count on for wealth transfer, regardless of how the market is performing. Since the death benefit paid to beneficiaries is based on a combination of estimates and mortality predictions derived from actuarial tables, a life insurance policy’s proceeds are mostly insulated from market fluctuations.

In addition to providing greater certainty about the value of assets being passed on to heirs, life insurance policies can also help high-net-worth individuals avoid passing on steep taxes to children. Life insurance death benefits are not subject to income tax, and policies can be structured outside of the estate to ensure that life insurance proceeds are not subject to estate taxes.

Meanwhile, as far as making sure that the wealth lasts, life insurance benefits can be structured in a trust. Financial professionals can help their clients structure a trust so money is passed on to the right people at a specific time and amount. In this way, individuals can ensure their estate planning wishes are carried out to the letter while avoiding disputes and power struggles among family members.

As with any financial endeavor, proper planning is essential for a wealth transfer. When it comes to something as important as passing on assets to children, there’s no doubt parents will want to ensure they have a comprehensive strategy in place. It’s the duty of financial planners to help them explore their options and make sure the mechanisms serve their needs. For many high-net-worth individuals, life insurance can be the ideal solution.

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