Best financial tools for families to build Generational Wealth

Generational wealth is rumoured to disperse by the third generation. This is due to a lack of financial literacy on its preservation. While many families know how to accumulate generational wealth, most do not know how to retain or maintain it to pass it on to their successors and secure their financial future.

How to build generational wealth

Here we look at three financial tools through which a family can preserve their generational wealth to pass it on to their successors:

Family investment company

A Family Investment Company (FIC) is a family business mostly relevant to the United Kingdom. It is a private company where family members are the shareholders. It is an alternative investment vehicle to a family trust where the parents create family wealth in a tax-efficient manner and plan future succession for their children. It could be both a limited or an unlimited company, but most opt for registering an FIC as limited companies due to its limited liability protection. Families can put cash or assets in that company, create shares, and then transfer the financial wealth created to the children and their generations to come.

FICs are beneficial to build generational wealth because it allows parents to retain control over the assets in the company. Parents, therefore, can be the director or the majority shareholder, retaining all the voting rights. However, they will not have any rights over the financial wealth itself because they are not the ultimate beneficiaries - their successors are. Their successors will be entitled to financial dividends, profits from those shares, and other wealth generated. Hence, the older generation can have operational control while placing the ownership of the financial wealth onto the younger generation. This allows them to transfer the capital to their children without facing inheritance tax.

Parents can either reinvest the financial profits or pay dividends to the shareholders (successors). Either way, the financial value of FIC grows over time which helps build generational wealth in the long term.

Other tax benefits include:

  • financial relief on property mortgage interest
  • lower taxes on capital gains
  • no inheritance tax charged on cash transfers to FICs if it exceeds the national financial threshold (£325,000 in the UK)

Of course, there are some downsides to FICs, mostly because it is costly to set them up, and there are possibilities of tax reforms that could influence the financial benefits of the generational wealth. Using properties as assets in the company could result in capital gains tax and stamp duty, reducing the overall wealth. Paying out in dividends will lead to corporation and income tax, which could be higher than the capital's value.

Family Office

A family office is a private entity that manages the financial wealth of a high net worth family and their future generations. They can develop a wealth planning strategy for a single-family or multi-family and focus on their financial success. Multi-family offices serve multiple families as clients and single-family offices only serve one family. The goal of a family office is to grow and pass the financial wealth on to its generations. They handle a number of non-exhaustive tasks, including investments, property matters, day-to-day accounting and payroll, legal matters, succession, public relations and other families issues relevant to their finances. Hence, they need a team of professionals to coordinate their wealth management, starting from actual finances to financial literacy. These entities are different from regular wealth management companies because their capital comes from the family, and they not only look after financial investments but other matters regarding their wealth. They offer a more personalised solution specific to the family for sustaining and growing wealth. Overall, family offices provide crucial services to wealthy families to guide them through the complex world of generational wealth management after accumulating them.

Family offices are beneficial for generational wealth for numerous reasons:

  • Family offices are independent and do not receive incentives from product usage, unlike traditional brokerage firms. This is because of their service delivery based business model, which allows them to prioritise the family's interests and wealth and offer services based on their expertise from an objective perspective.
  • Family offices have collective expertise in different areas that contribute to their generational wealth, such as finance, legal, public relations, education and business management, and many others. This allows the family to narrow down the services to one single entity that knows the family's ins and outs and provide them with optimal solutions.
  • Family offices are aware of the generational dynamics in a family, which eases the wealth planning amongst the members. This could include helping with succession in a tax-efficient manner, counselling the younger generation of their family's wealth and even helping with communication amongst the family members from the start. This allows them to get creative in resolving any dispute externally and internally.

Non-traditional platforms

FICs and Family offices deal with regular investment tools, such as business ownership and investing in well-known assets from traditional and alternative vehicles. Depending on their risk tolerance or how much they can afford to diversify, a family can adopt new or unexplored wealth growth tools to further support their generational wealth. The following are some examples that a family can look into:

  • Digital investment platforms: A family can invest for themselves or their members in digital investment platforms for generational wealth. This could be peer-to-peer lending, digital investment funds, crowdfunding or cryptocurrencies. The benefit of such platforms is that most of these companies offer bonuses for bringing in new members, which a family could take advantage of. Most of these platforms allow investors to tap into money markets indirectly, which would otherwise be inaccessible to the general public due to high capital requirements (e.g. real estate) to reach their financial goals. These platforms are also convenient to use - meaning that there are no strict legal formalities to become their investors other than providing identity documents to be verified. The minimum capital requirement is usually low, and it is affordable for families who are not particularly wealthy. This is not only a good start for families who are just beginning their journey into generational wealth growth but also a vehicle that families can utilise to cushion their financial maintenance in the long term.
  • Precious metals: Precious physical metals like gold and silver have been collected for a long time. It is a well-known traditional method for hedging inflation, market crashes, and supplementing generational wealth. Some store these precious metals in the form of bullion. Precious metals have an intrinsic value due to their limited supply - they carry no debts, and they have little to no correlation with other assets. They are very useful in dire times, such as war, and they make sense as a backup investment for maintaining some level of wealth for generations. However, they should not be relied upon alone as they carry the risks of security, storage and price fluctuation. They should be included in the portfolio along with other investments.
  • Collectables: These are items that are worth more than their original initial price because of their rarity or popularity. Examples are antiques, art, jewellery, coins, stamps, comics, wine, etc. Many older family members collect and store them during their lifetime, increasing in value as time passes. Younger family members can inherit them and reap their benefit by selling them to private collectors or in auctions for money. The advantage of such investment is that it often requires no initial capital as an older family member may have them from the beginning. However, collectables are not to be held as a standalone investment tool for generational wealth growth, as they can be very risky and not to mention difficult to store. They are meant to supplement other wealth growth and management methods.

All families wonder how to secure the financial future for their beneficiaries and leave a legacy for their generation to the next. To generate opportunity for the whole family requires mostly perseverance, such as creating an estate plan, sustaining the family businesses, leaving easy access to all the liquid assets (money, fund, saving accounts) and all the knowledge of financial strategies to be passed down. Regardless, financial education is the most important element to building generational wealth.

Last update: 06/05/2021

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