Many prestigious families throughout history lost their fortunes within just a few generations. Consider the Vanderbilts, whose fortune originated in the railroad industry. In the 19th century, their wealth amounted to a staggering $200 billion1 in today’s money. However, once the grandsons inherited that wealth, they squandered it on lavish Gilded Age mansions2 and expensive art.
In another example, the Strohs, owners of a top American beer empire in the 1980s, eventually forfeited the equivalent of $9 billion3 because of missed opportunities, a botched sale to Coors and heirs’ reckless spending on vices. And it was a sad day when the Wrigleys sold their beloved Chicago Cubs because of an estimated $40 million to $50 million4 tax bill, leading to family infighting.
These examples aren’t just cautionary tales; they’re profound illustrations of the vulnerabilities inherent in generational wealth transfer. An astonishing 70% of wealthy families lose their wealth by the second generation,5 while 90% lose it by the third. Consider the implications of this pattern given that baby boomers are projected to start the biggest generational wealth shift on record, passing down $68 trillion to their children in the coming years.
As difficult as it can be to build wealth, maintaining and growing it across generations has proved to be more challenging. At RWA Wealth Partners, we specialize in navigating the risks that can deplete your wealth as it’s passed down, whether you’re facing intricate family dynamics, crushing tax burdens, claims from creditors or a complicated divorce. We provide tailored recommendations for generational wealth transfer and legacy building so your family can effectively manage and preserve your wealth.
So, how can you beat the odds and ensure your wealth continues to be passed down for generations?
Personal tax rates are probably going in one direction: Up.
Foundations of Wealth Transfer: Laying the Groundwork
Successful wealth transfer starts with assessing your lifetime income and what your family might inherit. As part of this process, you need to consider tax efficiency and put together a framework for wealth distribution.
Evaluate income needs for your lifetime
Before deciding how to divide your estate, consider the value of all assets, including bank accounts, brokerage holdings, retirement funds, and alternatives such as real estate and private equity. Then subtract liabilities, including debts and mortgages, to calculate your current and projected net worth. Work with an advisor to forecast your cash flow needs for retirement, factoring in expected health care costs and long-term care. You should have sufficient assets to cover these expenses for your lifetime while keeping an emergency fund.
Once you have a comprehensive view of your net worth and income needs, you can strategize tax-efficient giving. Without proper planning, large estates can face staggering tax burdens amounting to millions of dollars in estate taxes—as exemplified by the Wrigley family.
Lifetime estate tax exemption
In 2024, the lifetime federal estate tax exemption allows individuals to give $13.61 million tax-free ($27.22 million for married couples). However, this will probably decrease in 2026, likely reverting to about $7 million because of the expiration of the Tax Cuts and Jobs Act. This brief window offers a limited opportunity to reduce your taxable estate while exemptions are at historic highs.
Annual gift tax exclusion
Besides the lifetime exemption, you can use the IRS’ annual gift tax exclusion ($18,000 in 2024) to give to any person6 without it counting toward your lifetime limit. Because this exclusion applies on a per-person basis, you can multiply it for multiple recipients. For example, if you have three children, you can give each child $18,000. Married couples can pool their annual exclusions together and give $36,000 per person through gift splitting. Strategically leveraging annual exclusions year after year allows you to give substantial amounts over time without dipping into your lifetime exemption.
Family limited liability companies (FLLCs)
FLLCs allow you to gift membership interests at reduced valuations, minimizing the taxes you owe when transferring wealth. By setting up an FLLC, you can take advantage of valuation discounts by transferring non-voting membership interests rather than the underlying assets. The restricted control and liquidity of these limited interests mean they can be valued at a 25% to 40%7 discount compared to the proportional value of the assets in the FLLC. Any discount from fair market value reduces the taxable gift amount, allowing you to leverage your lifetime exemption and transfer more assets tax-free to the next generation. When properly set up, an FLLC enables you to reduce estate taxes while keeping control through a managing member position.
Charitable giving
Charitable giving not only supports worthy causes, but it also serves as a strategic tool to reduce your taxable estate. In 2024, cash donations to eligible charities can qualify for deductions of up to 60% of your adjusted gross income (AGI), though this will probably decline to 50% by the end of 2025. (Gifts exceeding the threshold face a top tax rate of 40%, which can quickly add a large bill to your wealth transfer plans.)
Donations can effectively reduce your net worth for tax purposes, and you can often deduct charitable gifts from your total estate, further decreasing potential estate tax liability. By gifting appreciated assets like stocks or real estate, you can frequently avoid capital gains taxes and harness estate tax deductions based on the full market value. Through thoughtful structuring of your donations, you can maximize tax advantages and channel more resources to the charitable endeavors you’re passionate about.
As soon as possible, consult an advisor to develop a personalized gifting strategy that maximizes tax breaks. Remember that the current generous deduction limits are likely temporary.
Determine fair distribution
Let’s say you have three adult children, so you assume that means you should split your estate three ways. But one child helped build your family business, another pursued a career in teaching and the third is a successful attorney. Equal division in this case may not sufficiently provide for the schoolteacher or properly reward the child who helped expand the business. Dividing assets evenly between heirs often seems fair, but it can overlook critical nuances.
When deciding how to divide your estate, consider evaluating each family member’s situation. Review their financial needs, employment status and income levels, as well as their family and marital circumstances. And document your decisions.
Transparency and open communication help everyone understand the rationale. For instance, you might place the family business under the management of the involved family member and put other assets in trusts, benefiting each child proportionately. Emphasize fairness over favoritism.
If you’re concerned about someone’s level of financial responsibility, you could opt to grant them restricted access to funds by placing assets in trusts with defined disbursement conditions. You might also give your family members a chance to show improved responsibility over time and gain fuller access. And you can always seek mediation from a neutral third party. When emotions are high, an objective perspective can prevent a disagreement from escalating into a conflict. With discretion and empathy, you may be able to address fiduciary concerns while avoiding total disinheritance.
Honor all voices
We often encounter three different mentalities within one household: The spender, the saver and the giver. The spender prioritizes enjoying wealth now. The saver seeks to grow their fortune through conservative investing and compounding interest. The giver wants to donate a larger portion to charity. At RWA Wealth Partners, we help unite these different financial personalities.
First, we use open conversations to understand everyone’s priorities. Then we collaborate to create a unified vision that blends these diverse preferences. This may involve allocating to a lifestyle fund, to an investment portfolio, to trusts and accounts for heirs, and to a donor-advised fund (DAF). Each family’s situation is unique, and so is each member’s goals. By listening to all voices, we can develop a solution that works for everyone.
Balance sufficiency and incentive
When transferring wealth, you want to provide sufficient resources while encouraging responsibility. To help achieve this balance, consider using structured vehicles such as trusts instead of giving direct cash gifts. For instance, you might set up incentive trusts that tie distributions to achievements, disbursing a certain amount when someone graduates from college, starts a business, purchases their first home or gets married. You could also establish age-based milestone trusts that release portions of the inheritance at 25, 30 and 40 years old. These options provide resources at pivotal life stages while encouraging responsible behaviors.
If you have a family business, a family limited partnership (FLP) can be another method for creating structure and boundaries. This may involve creating an LLC as the general partner to provide oversight, with family members as limited partners. The governing documents for the LLC can outline policies for transfers, distributions and decision-making authority. For example, you might require that family members be active in the business for several years before unlocking full distributions or voting rights.
More broadly, proper succession planning lays the groundwork for the next generation to lead the family business. This may involve training and mentoring your children to prepare them for leadership roles. It also requires establishing procedures for inheriting and transferring ownership stakes, such as gifting FLP interests at certain milestones or ages. Explicit shareholder agreements prevent confusion down the line when leadership transitions occur.
Providing substantial funds without structure, however good your intentions, can reduce motivation and self-sufficiency. Consider empowering your heirs by connecting your gifts to their own accomplishments. This ensures financial support at pivotal moments while continuing to reward personal growth and ambition.
Protecting Wealth From External Risks
Once your wealth transfer strategy is in place, you need to guard it against risks such as creditors, debts and the financial complications of divorce. Recall the fate of the Strohs: By 1999, they had to sell significant portions of their legacy to cover debts, leaving the family with a rapidly depleting fund that ran out by 2008. Equally telling is the impact of divorce on personal fortunes. Jeff Bezos and MacKenzie Scott’s 2019 divorce resulted in a staggering $38.3 billion settlement, while Bill and Melinda Gates’ high-profile split in 20218 cost an estimated $76 billion.
Shield wealth from creditors
Creditors can be like sharks going after your wealth. Lawsuits and legal judgments, even when unwarranted, can result in creditors seizing your assets and tying up your wealth for years. Business ventures carry inherent vulnerabilities as well, with creditors able to pursue the personal assets of owners and shareholders in cases of debt default or bankruptcy.
And then there are unsecured debts like credit cards and personal loans, which grant creditors access to accounts, property and other assets for repayment and collections efforts. In addition, massive health care costs and long-term care expenses can rapidly drain wealth, allowing creditors to step in and extract assets. You can also be a target for creditors and litigants simply because of the perception of your wealth. With the various pathways creditors can use to tap into family fortunes, protection is fundamental to preserve generational wealth.
Fortunately, there are strategies that can help safeguard your assets. Trusts, legal arrangements and the right insurance coverage can offer protections. Let’s look at some examples.
Asset protection trusts (APTs)
When assets are transferred to an APT, they’re essentially owned by the trust, not the grantor. Therefore, if a creditor makes a claim against the grantor, the assets in the APT are generally not accessible (provided you’ve properly established the trust and didn’t fund it with fraudulent intent).
A neutral third party maintains discretion over distributions, ensuring that the grantor doesn’t have direct control, which could potentially undermine the protective nature of the trust. The legal framework and strength of an APT largely depend on the specific laws in the state in which it is established. Not all U.S. states permit APTs, but Alaska, Delaware, Utah and Nevada9 are among those that do.
Family limited partnerships (FLPs) for creditor protection
In addition to potential tax advantages and succession planning benefits, FLPs can offer some degree of creditor protection. Generally, a creditor pursuing a limited partner cannot directly access the partnership’s assets. Instead, they may only get a “charging order,” which gives the creditor the right to distributions that would otherwise go to the debtor partner.10 This protection makes FLPs less attractive to potential creditors.
Consider divorce risks
Divorce presents complex risks when you’re planning for generational wealth transfer. The division of assets and alimony obligations can redirect or deplete inheritances meant for your family. Even an amicable split can derail your intentions, while contentious lawsuits may rapidly drain funds allocated for heirs. With a divorce rate of 35% to 50% for first marriages and 60% to 70% for second marriages,11 you should set up protections against divorce upstream. Here are a few of the main options.
Prenuptial agreements
Prenuptial and postnuptial agreements can protect family wealth, especially when that wealth is significant or there are business interests at stake. These cornerstone agreements document which assets will be marital property (which can be divided in a divorce) and what will remain separate property. Make these agreements routine to secure family assets.
Trusts that offer divorce protections and solutions
Thoughtfully designed trusts can provide additional protections from divorce. Discretionary trusts give trustees full discretion over distributions, safeguarding funds from beneficiaries’ creditors, such as ex-spouses. Dynasty trusts specifically structure assets to remain with the grantor’s child.
Qualified terminable interest property trusts (QTIPs) can be valuable tools for second or subsequent marriages. This trust structure aims to support the financial needs of a surviving spouse throughout their lifetime. After the spouse passes, the remaining assets in the trust go to the designated descendants, often children from a prior marriage. This ensures the spouse is cared for while also guaranteeing that the children from earlier unions receive their intended inheritance.
Facilitating Proactive Dialogue
According to a recent survey, 83% of investors worry about smoothly transitioning their assets, yet only 40% have discussed their wishes with heirs. This comes as no surprise considering that these discussions can be sensitive. But structured family meetings can provide transparent communication and education that aids the wealth transfer process. Here are a few points to keep in mind when you talk with your family.
Clarify the objective
Who needs to attend your family meeting? What would you consider a successful outcome? Do you want to collaborate on an inheritance distribution plan? Are you looking to educate the next generation on wealth management? Do you just want to introduce your heirs to your advisors? Defining clear objectives can help you achieve your meeting goals and keep everyone on the same page.
Set an agenda
Establishing and communicating a plan can make your family meetings more productive. RWA Wealth Partners can help disseminate tailored agendas ahead of time, covering discussion areas tailored to your family’s needs and goals. Topics may include inheritance plans, business succession, tax strategies or decision-making frameworks.
Also consider including pre-reads to inform attendees and align expectations. A family mission statement, customized education content or proposals for wealth structures can be useful. Setting the stage with defined topics and shared knowledge sets you up to have focused, constructive dialogues.
Decide who should attend
When organizing family meetings, you’ll need to consider who to invite and how close to keep your circle.
By involving children and grandchildren in financial discussions early on, you can equip them with the tools and knowledge to manage their future inheritance responsibly. This early engagement fosters financial literacy, aligns heirs with family values, and provides the practical experience necessary for strategic wealth management in their own lives. Giving them a voice now can be empowering and show them they have an interest. It may turn a top-down directive into an inclusive, collaborative approach.
You’ll also need to decide which other family members to include. If you have a blended family, for example, you may opt to include trusted in-laws and spouses from second marriages who play parental roles, as they may have influence over heirs’ financial decisions. However, you may decide to limit the involvement of those without direct inheritance stakes to minimize tensions if the conversation veers into sensitive distribution plans.
RWA Wealth Partners can facilitate a family meeting and assist with all the above. We can include our full team of advisors covering financial, tax, estate and retirement planning, and we can provide expertise customized to your family’s preferred style and meeting goals.
Address emotional concerns
Wealth transfer planning can elicit vocal opinions and heightened emotions. Beneficiaries may have powerful reactions to distribution decisions that appear unequal or unjustified. A third-party advisor like us can create a buffer, validating these responses and addressing sensitive issues head-on. For example, we can help explain that protecting a child’s inheritance through asset protection trusts can be a way of safeguarding their future, not limiting current access.
While financial planning analyzes taxes, protections and control, we never lose sight of the human relationships affected by these choices. If all parties feel heard, respected and clear on the reasoning behind decisions, this can go a long way to reduce potential conflicts.
Think of the current estate tax breaks as a limited-time offer.
Using Charity Work To Teach About Wealth
Philanthropy can be a powerful way to educate your family about wealth and responsibility. By directly involving family members in charitable activities, you can provide meaningful lessons about finance, values and charitable giving strategies. With some thoughtful guidance, philanthropy gives the next generation safe, hands-on experience in wealth management.
Consider the following ways to use charity work to impart essential knowledge and perspectives.
Direct involvement
Involve your children and grandchildren directly in charitable projects to provide real-world experience with financial planning and management. For example, let them take the lead on organizing a fundraising event for a cause they care about. Guide them through the process of creating a budget, managing expenses, fundraising and measuring impact.
Charitable donation vehicles
Introduce your family to the inner workings of donor-advised funds, charitable trusts or family foundations. Assign roles that allow active participation: One member can monitor the fund’s performance and report on its growth, while another could handle the review and selection of grant proposals. Taking on these roles can help family members understand the importance of due diligence and the direct impact of donations.
You can hold regular family meetings to discuss and refine your donation strategy, aligning it with shared values and desired causes. Include educational sessions that address tax implications, mandatory distributions, and the relationship between investment returns and the foundation’s assets. This approach not only strengthens philanthropic contributions but also imparts essential financial knowledge.
Philanthropy
Integrate philanthropy into your family’s legacy by actively involving multiple generations. Invite younger family members to research and present charities and causes they’re passionate about. This offers them a platform to cultivate their critical thinking and decision-making abilities, and together, you can evaluate the broader societal impact of your donations and even volunteer. Collaborating like this benefits the charities you give to, but it also nurtures a genuine appreciation for the role and responsibility of wealth in shaping positive change.
Long-term strategy
Involve your family in mapping a long-term vision for your philanthropy. Together, you can align your charity work with your family’s values and wealth management objectives. Discuss how philanthropy and responsible wealth management can further your family’s legacy, and explore how other families have achieved their giving goals. Maintaining this big-picture view ensures your wealth will make an impact for generations to come.
The Preservation of Wealth and Legacy
The wealth you built is connected to your aspirations and ambitions. However, as wealth transitions through generations, the clarity of your original vision can become obscured. Statistics show a remarkably rare 1 in 10 families preserve their wealth past the third generation. Lack of financial planning, inefficient tax strategies, creditors and divorce are top culprits that can erode your wealth. Even well-intentioned family members, if ill-equipped and underprepared, can deplete the wealth you’ve diligently built.
RWA Wealth Partners can help you prevent this fate. Our focus is you, your family and the human side of wealth. We recognize that this can be complicated. But together, we can create a plan that helps your wealth endure for generations. Get in touch today to discuss how you can enrich your legacy and make a lasting difference for your family.
The current tax code has an expiration date, and the sunset is approaching faster than a filibuster in a contentious Senate debate.
Sources:
1 Colon, B. (2023, September 19). Anderson Cooper’s family was once worth $200 billion, but what is his net worth today? Hello!
2 Robehmed, N. (2014, July 14). The Vanderbilts: How American royalty lost their crown jewels. Forbes.
3 Dolan, K. (2014, July 8). How to blow $9 billion: The fallen Stroh family. Forbes.
4 Fritz, M. (1999, August 7). Wrigley estate mired in a sticky dispute. Crain’s Chicago Business.
5 Nasdaq. (2018, October 19). Generational wealth: Why do 70% of families lose their wealth in the 2nd generation?
6 Internal Revenue Service. (n.d.). Frequently asked questions on gift taxes.
7 Rubinstein, A. (2013, March 1). Family limited partnerships & discounting. Gallet Dreyer & Berkey, LLP.
8 Segal, T. (2023, April 30). The most expensive divorces in history. Investopedia.
9 Wyoming LLC Attorney. (n.d.). Florida asset protection trust.
10 BNY Mellon Wealth Management. (n.d.). The benefits of a family limited partnership.
11 Klein, E. (2023, July 24). Exploring the latest trends in US divorce data: 2023 insights. Klein Attorneys.
Disclosures:
For informational purposes only. Our statements and opinions are subject to change without notice. Data and statistics that may be contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.
Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with our wholly owned subsidiary, RWA Tax Solutions, LLC. We do not provide legal advice, nor sell insurance products. Legal services may be available via a separate, written engagement agreement through our exclusive relationship with Hall & Diana LLC.
Always consult a licensed attorney, tax professional, or licensed insurance professional before taking specific action.
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