As you work to build wealth, considering how you will define your legacy is a big part of ensuring your Estate Planning efforts are not done in vain.
Legacies are unique - it is your own story built on the values, wisdom, and learned experience that you have accumulated throughout your years. Distribution of your assets also play a key role here.
Defining your legacy will help you decide how you would like to pass on your assets - but what will that look like? Will this transfer be in the form of a substantial amount of money, a piece of real estate or a family heirloom? Whatever the item, it is important to have a plan in place, because as many have learned during housing booms and busts… you can’t spend your house.
How are people passing down generational wealth?
There are many ways to transfer wealth to the next generation. While cash and real property have always been one of the most common assets of inheritance, the market has become more flexible. Consider the following assets that many families are now incorporating into their Wills:
Rental Properties via LLCs
Life insurance policies
Investments and stocks
Family businesses
Personal property such as antiques, heirlooms, and other collectible items
What items of value (either financial or sentimental) currently come to mind that you might pass down?
Why rental properties are becoming a hot ticket item
Investing in rental properties is one of the most effective ways to achieve portfolio diversity and pass wealth along to future generations. Not only does this option offer long-term passive income when properly managed, but it provides benefits like vacation or extra housing if needed.
Not only does real estate have the ability to double in value over time, but multifamily rental properties provide owners with rental income monthly. As real estate value increases, so will the amount of monthly rent you can charge. That said, there are a few pitfalls to watch out for if you choose to use rental properties as your only means of generational wealth. Make sure your real estate is not the majority of your assets.
All that Glitters is not Gold
Remember, that blindly following trends is not a surefire way to build generational wealth. The real estate market is not guaranteed to always hold its value. It's a fixed asset and can fluctuate depending on supply and demand. Unstable market conditions can depreciate the value of your property, leaving less profit and monthly income. A once popular vacation spot might be hit with a natural disaster and dry up the demand for rentals. Regression is another common challenge with real estate value. This occurs when a better-quality property is adversely affected by the presence of a lesser-quality property. In addition to fluctuating value of your property, coming into a lease with disrespectful tenants can not only hinder your rent collection efforts, but could cause damage to your property. Tenant issues can be lessened by doing a solid background check on each applicant and trusting your intuition when interviewing each candidate.
Lastly, beware of reverse loans! Reverse mortgages allow homeowners over the age of 62 to borrow money against equity built up on their home. While this option may appear attractive due to the non-specification of its intended use, any time you borrow money you hinder your ability to grow wealth. Consider this a last-ditch resort.
Making a plan with a trusted fiduciary is a surefire way to safeguard your long-term personal wealth building goals.
The Role of Sandwich Generations
Sandwich generations also have the responsibility for checking on the status of their parents’ and grandparents’ financial security to ensure they have proper care as they progress towards older ages. Understanding where your elders stand financially will help you prepare for any voids that may require additional finances to cover in the future. We’ve talked about this extensively in my previous column about the role of the modern caretaker (part one and part two).
Considering your Estate Plan through the lens of generational wealth building will give your family long-term financial security and distinct advantages.
Establishing generational wealth and your legacy doesn't have to be a lofty pipedream — you can begin building it right away by sitting down with a Certified Financial Planner Professional and creating a holistic plan that accounts for your current economic background, cultural beliefs and values, and the hopes and dreams for yourself and your family.
Setting your loved ones up for success with a strong financial foundation? I can think of no greater legacy. Learn more about how Trust & Will can help you create or update your Estate Plan today.
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