Top Five Tips to Help Build Multigenerational Wealth
- Open a credit card for your children
- 529 Plan
- Minimize IRD Tax if your brackets allow it
- Lifetime Gifting Strategies
- Utilizing Trusts
As a CFP® professional working with affluent families for over a decade, I have learned a few tips and strategies to foster multigenerational wealth transfer. For starters, set your kids up for success by adding them as an authorized user on your credit card. For this tip, you don’t even need to have a high net worth; this is just a smart strategy to give your kids a head start. An important part of being financially independent is having a good credit score. While you will be the primary cardholder responsible for the charges, it will be a new account for your child’s credit report. Other helpful tips along these lines are to help your children and grandchildren have good money habits by showing them how to create a budget and communicating about personal finance.
The next successful tip in generational wealth planning is the utilization of 529 plans for your children or grandchildren. Do you know that over 30 states, including the tristate area, allow for state tax deductions on contributions to 529 plans? If you want to help, make sure your children or grandchildren aren’t saddled with Student loan debt or you want to efficiently gift money to them, a 529 plan is a great vehicle. In Connecticut, you can gift $10,000 into a 529 plan and get a state income tax deduction. The money in a 529 plan grows State and Federally tax-free if used for education; most States allow for K through college/graduate school, and some States only allow for qualified higher education such as college. You can open a 529 plan even before you have a child or grandchild and then change the beneficiary to them later. Under the Secure Act 2.0, 529 plans at least 15 years old can transfer up to $35,000 from the 529 plan into a Roth IRA. Lastly, 529 plan funds are not part of your estate, which makes it an excellent estate planning tool.
A significant strategy in minimizing estate taxes, lowering IRD taxes, and setting your children and grandchildren up for financial freedom is Roth Conversions. If you were in the 35% tax bracket while you saved into your 401(k), but now you are only in the 24% bracket in retirement, you have an 11% spread on your deferrals, not including the payroll tax savings. Convert funds that don’t push you into the next tax bracket at the Federal, State, and other brackets like IRMMA. If the market is having a big pullback, that is an ideal time to convert a security at a low dollar amount and pay taxes when it is down. Estate tax is based on the total Estate value, an IRA with 1 million dollars is only worth $700k if you have an effective tax rate of 30%. I rather have $700k tax free to pass onto my heirs then $1 million fully taxable, especially if I am going over the Estate tax limit. With the changes in the Secure Act, you have ten years to withdraw funds from an inherited IRA; if this is during your peak earning years, you could end up paying more in taxes than your parent’s tax rate when they deferred the funds. This makes the Roth even more valuable as a way to mitigate some IRD taxes on the IRA funds.
Once we start getting into the higher net worth space, minimizing estate tax becomes a big priority in generational wealth transfer. A common strategy is to use your annual gift exclusion of $19,000 for 2025 directly to your children or grandchildren or to use a trust to hold the gift. A common strategy I see is to place an insurance policy in a trust and to gift the premiums to the policy. If you purchase a $2.25 million dollar policy with annual premiums of $19,000, you are moving $19,000 out of your taxable estate each year and creating wealth on the other side for the tax barrier. Ensure the insurance will still generate a reasonable rate of return by certain ages before doing this step.
The final tip is to use Trusts to either hold assets you think will appreciate and would cause estate taxes or to use trusts to bypass probate. If I have a lot of stock that I anticipate will appreciate I can gift it annually or use part of my lifetime exemption of $13.99 million to remove it from my estate, by gifting to an irrevocable Trust. This could shield a lot of estate tax if that stock were to grow at a high growth rate. Additionally, moving assets like a home into a revocable trust can help with avoiding the probate process, which can be costly. If you don’t have enough funds to want a trust, some states allow for a beneficiary or a TOD on your home deed. If this is your only asset without a beneficiary on it, this will help you avoid probate.
If you do a few of these items on the list, you will greatly improve your family’s ability to retain and grow wealth for generations to come. For more insights, reach out to us at Moneco Advisors.
Sources:
https://www.fidelity.com/learning-center/personal-finance/529-rollover-to-roth
https://thepointsguy.com/credit-cards/children-authorized-users-credit-cards/
Important Disclosures
Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing. (19-LPL)
LPL Financial representatives offer access to Trust Services through The Private Trust Company N.A. an affiliate of LPL Financial. (154-LPL)
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing includes risks, including fluctuating prices and loss of principal. No strategy ensures success or protects against loss.
This commentary reflects the personal opinions, viewpoints, and analyses of the Moneco Advisors employees providing such comments and should not be regarded as a description of advisory services by Moneco Advisors or performance returns of any Moneco Advisors client. The views reflected in the commentary are subject to change at any time without notice.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.