facebook
Generational Wealth Transfer: Navigating Family Dynamics
June 22, 2023
Tom Sudyka, CFA®, Partner and Portfolio Manager
Adam Yale, Partner and Portfolio Manager
Bruce Van Kooten, CFA®, Partner and Portfolio Manager
Chad Clauser, CFA®, Partner and Portfolio Manager
In part one of this series, we examined why it is important to consider managing the wealth that you pass down to future generations—to your children, grandchildren, and future generations. How to transfer your assets, financial resources, and other forms of wealth to the next generation is a decision with many implications. With proper planning you can leave a legacy for future generations, avoid family conflicts after your passing, and minimize taxes for your heirs.

In part two of this series, we will guide families and individuals near or at retirement through the process of navigating the family dynamics involved in generational wealth transfer.

Key Takeaways:

  • Family dynamics play a large role in estate planning decisions and family members may have different values and priorities around money.
  • Make certain to have open and honest discussions with your family regarding your estate plan so they have the opportunity to discuss and fully understand your intentions.
  • Select a reliable partner to help you not only navigate the estate planning process, but assist with family discussions regarding your wishes for estate planning.

How Parents Can Help the Next Generation Successfully Manage Inherited Wealth

Family dynamics are complex and tend to become more so when the subject of estate planning arises. Not only do you have to consider immediate family, but extended or blended family members may be part of the equation as well. Furthermore, spouses of family members may contribute their own opinions, making the process even more challenging.

No matter how strong the family dynamic, estate planning is rarely a straightforward matter because emotions are involved. What is the emotional impact of newfound wealth, the tax considerations of transferring wealth to your children, and tips for selecting a partner to guide you through the estate planning process?

No matter how strong the family dynamic, estate planning is rarely straightforward because emotions are involved.

Download our Comprehensive Guide to Generational Wealth Transfer today and be prepared to successfully convey your wealth to the next generation.

The Emotional Side of Wealth Transfer

Family dynamics can play a large role in estate planning decisions. Family members often have quite different values and priorities—it’s important to try to find alignment within the family about investment strategies and goals. This process may take time, patience, and creativity.

Blended family situations, for example, may require special considerations. Will stepchildren be included in your plan, and if not, how will this impact the family dynamic going forward? Or, you may need to make specific plans for family members with poor decision-making skills or substance abuse issues.

What is the best way to start a discussion about estate planning with family members? Many choose to have a third party lead the discussion, such as your attorney or your current wealth management team if you have one. Whatever you choose, keep in mind that transparent and open communication is key. This approach allows everyone to express their feelings, reach a mutual understanding, and avoid potential conflicts later on.

No matter how well you have specified your wishes in a will, trust, or through gifts, there may still be disagreements among children over the assets. The best way to prepare for this is to appoint an executor or trustee that you believe will be fair to all parties.

Special circumstances, such as a family member being excluded from the estate plan or assets being left to a non-family member or institution, can also create challenges. This is why discussing your values and goals with your family during your lifetime is crucial, even if it causes initial hurt feelings. This approach may help ensure that your family understands your intentions and has the opportunity to discuss them.

It is important to try to find alignment within the family regarding investment strategies and goals. This process may take time, patience, and creativity.

Address the Family Dynamics that Can Impact Estate Planning

Sudden wealth can create new emotional and financial challenges for your children.

Dividing assets among children can be a difficult task. You may opt to distribute assets equally to avoid creating any tension among siblings. However, there may be situations where you prefer to give your children different amounts based on individual circumstances. For example, one child may have an extremely wealthy spouse while another may be a single parent raising two children on one income. Parents may choose to leave the single child more money given the situation.

Open communication with your children is imperative. In such cases, it’s crucial to explain the difference between equality and fairness when it comes to your estate plan. You may need to explain that even though the distribution isn’t equal between siblings, it is only fair that one child shouldn’t needlessly struggle financially.

You may also need to consider special situations, such as planning for your child’s welfare if he or she is disabled. Based on their income, if any, most if not all disabled children are eligible for Supplemental Security Income and Medicaid. By contrast, leaving money to your child directly in a will would most likely eliminate their eligibility for Supplemental Security Income and Medicaid.

With any type of inheritance, you will need to make important decisions such as dealing with capital gains on the sale of assets and managing IRA distributions. Proper administration of these matters, both before and after the passing of the benefactor(s), can make a meaningful difference in the amount of tax saved or paid. It is important to discuss these matters with your advisors sooner rather than later.

With any type of inheritance, you will need to make important decisions, such as dealing with capital gains on the sale of assets, and managing IRA distributions.

Helping Your Children Manage the Tax Implications of Inheritance

Because the estate planning strategy you select will have an impact on the taxes your children will pay, make certain to plan wisely. Below are the taxes your estate and children may encounter after you have passed away:

ESTATE TAX. Estate tax is charged against the estate, no matter who inherits the assets.

INHERITANCE TAX. Inheritance tax is charged against the beneficiary of the inherited assets. While the federal government levies an estate tax, there is no federal inheritance tax. However, depending on the state, you may be required to pay a state estate tax, inheritance tax, neither, or both.

GIFT TAXES. Gift taxes are federal taxes paid by a donor who gives money or property to someone else. Here are some tools to assist in reducing or eliminating estate, inheritance and gift taxes:

  • Gift Tax Exclusion. The federal government’s gift tax exclusion for 2023 enables you to give away an amount up to $17,000 per person to an unlimited number of individuals–without impacting your gift and estate tax exemption.
  • Grantor Retained Annuity Trust. In certain cases, a grantor retained annuity trust can be set up so that families and individuals can move assets to their heirs while using little to none of their federal gift and estate tax exclusion. With this type of trust, the grantor gives up control of the assets during the term of the trust and receives regular annuity payments and the appreciation on the trust assets move to the heirs free of gift or estate tax.
  • Qualified Personal Residence Trust. A qualified personal residence trust requires you to transfer the ownership of your home or homes into the trust. Because you are not the owner of the home when you pass away, the value of the home is not included in your estate, removing it from being subject to estate taxes.

Because the estate planning strategy you select will have an Impact on the taxes your children will pay, make certain to plan wisely.

Choose Your Partner and Monitor Your Plan

When it comes to creating your estate plan, you have a range of options to consider. You could opt to work independently, hire individual experts and oversee them, or seek guidance from a wealth manager who has a team of experts at their disposal.

In Omaha, there are many choices available. However, it is crucial to make certain that your objectives are aligned with your advisor, the fees are reasonable, and there is a plan in place should your advisor leave the firm.

Additionally, it is essential to stay in touch with your team of professionals on a regular basis to ensure your beneficiaries and assets are up to date, and to inform them of any significant life changes.

It is crucial to ensure that your objectives are aligned with your advisor, the fees are reasonable, and there is a plan in place should your advisor leave the firm.

Final Thoughts

At Lawson Kroeker, we spend a significant amount of time thinking about our clients’ future goals, their financial plans and our role in helping them get to where they want to be. We know our clients have many retirement planning and wealth transfer options available. We also understand sometimes life happens and that you need your resources at hand in case of an emergency.

It is important to take all of these considerations into account when thinking about how to transfer wealth to adult children, a philanthropic organization, other causes or institutions. We strive to custom construct wealth planning platforms for you to achieve your goals.

About Lawson Kroeker

Lawson Kroeker Investment Management, founded in Omaha, Nebraska, is a third-generation wealth management firm that helps a select group of high-net-worth clients achieve their life goals by providing investment advice and building custom solutions. Lawson Kroeker’s disciplined, patient investment management process focuses on owning the stocks and /or bonds of a focused group of individual businesses. Established in 1986, the firm has under management approximately $600 million in assets.

Tom Sudyka, Jr. CFA®, Partner and Portfolio Manager—Mr. Sudyka began his career as a portfolio manager with several large Midwest-based investment management companies. He served as a managing director and founding partner of BPI Global Asset Management before joining Lawson Kroeker in 1999. His investment decisions are guided by his 30+ years of investment management experience. He has an M.B.A. in Finance from the University of Nebraska and a B.A. in Finance from Creighton University.

Adam Yale, Partner and Portfolio Manager—Mr. Yale started his investment career in 1997 with First Manhattan Co., an investment advisory firm in New York, NY as an analyst of publicly-traded real estate securities and direct real estate investments. From 2006 until the 2022 merger with Lawson Kroeker, Adam was the sole Principal at Red Cedar Capital, LLC, a Registered Investment Advisory firm he founded that employed a fundamentals-based investing strategy. He earned a B.A from the University of Michigan and a Master’s in Accountancy from the University of Denver.

Bruce Van Kooten, CFA®, Partner and Portfolio Manager—Mr. Van Kooten has been a Lawson Kroeker Partner and Portfolio Manager since 2006 and has more than 45 years of institutional and private investment management experience. Bruce has worked as a trust investment officer with First National Bank of Omaha and as a senior investment portfolio manager in Denver at KPM Investment Management, which became Wells Fargo Private Asset Management. Bruce earned the Chartered Financial Analyst (CFA®) designation in 1987 and is a member of the CFA® Society of Nebraska. He has a Bachelor of Science degree in Business and Economics from Iowa State University.

Chad Clauser, CFA®, Partner and Portfolio Manager—Mr. Clauser began his investment career as a senior analyst at an Omaha-based investment advisor Tributary Capital Management, and later as vice president of the New York investment bank Credit Suisse. He earned the Chartered Financial Analyst (CFA®) designation in 2009 and is a member of the CFA® Society of Nebraska. Chad attended the University of Nebraska in Lincoln, where he received a bachelor’s in Finance and completed minors in both computer science and mathematics.

Download our Comprehensive Guide to Generational Wealth Transfer today and be prepared to successfully convey your wealth to the next generation.