Wealth preservation is a top priority for families building their financial legacy. The key to creating the right wealth and estate plan, with investing and tax strategies in mind, is to use a comprehensive and customized approach.

According to our experts, the most important considerations are:

• Investing with short- and long-term priorities in mind
• Managing taxes and future costs
• Seeking advisors who can help protect your assets

Generational wealth planning and tax management are essential to what we call Active Wealth, a comprehensive approach to building and sustaining wealth. Forbes recently spoke to two BNY Mellon experts about how best to navigate these strategies.

Generational wealth planning

Outline Your Priorities

Along with understanding your investment goals, spending needs and risk tolerance, it’s important to know what you want to accomplish with your wealth, says Terry Charron, Family Wealth Investment Advisor. For many people, this means transferring assets to their children or grandchildren. It’s helpful to think about wealth in two categories: lifestyle and generational.

“In the lifestyle bucket, there are the assets you want to use in your lifetime to support your spending. Then in the second bucket, think about the money or wealth you want to leave to future generations,” she says. “You want to be very conservative in the lifestyle bucket, because you don’t want to run out of money. But with generational wealth, you could and should be more aggressive.”

Think Long Term

If your main focus is transferring your wealth, you have a distinct advantage when it comes to riding out highs and lows in the market. Because that money won’t be spent for another 20 or 30 years, there’s less concern about short-term market volatility.

“You can afford to ride out that storm and many storms like that,” Charron says. “You can be more aggressive on the investment side. It’s not uncommon to have a 100% equity portfolio for something that’s going to be generational in time horizon,” as opposed to a portfolio that includes conservative investments like bonds.

Control Your Spending

Even if your investments outperform the overall market, your spending can make or break how much money you transfer to future generations. Some helpful strategies include moving to a state with lower income taxes and adjusting the amount you withdraw from your portfolio based on how the market performs, known as “dynamic spending.”

“If you have a good year, maybe you can afford to spend a little bit more the next. But if the market has a correction in a particular year, then maybe the next year you curb some of your spending,” Charron says. “It’s about adjusting your spending from year to year to take into consideration the actual returns your portfolio experienced.”

Tax management

Future-Proof Your Tax Planning

Possible changes in federal tax law on the horizon include reduced exemption amounts, increased tax rates and limits on itemized deductions. So take advantage of current laws to reduce your tax exposure.

“Clients need to prepare, watch and wait,” says Jere Doyle, Senior Vice President and Estate Planning Strategist. “Now may be the time to sell assets at favorable long-term capital gains rates or to make transfers to certain trusts to beat the effective date of proposed changes.” Those who are hesitant to make a move now should prepare by completing documents and appraisals. That ensures that, if proposed changes appear certain, they can implement their plan on short notice.

Another option is to use those investments to fund donations to private foundations or donor-advised funds, which can boost charitable deductions. If you have money in a traditional individual retirement account, consider converting some into a Roth IRA to ensure more tax diversity in your portfolio. The taxable income realized by a Roth conversion could be reduced by charitable gifts for those able to itemize their deductions.

Understand Gifting and Low Interest Rates

Gifting is critical to effective tax planning—but comes with implications for gift, estate and generation-skipping transfer (GST) taxes if you exceed the current exemption amounts.  

“We are in the perfect storm for estate planning—a high transfer tax exemption, historically low interest rates, depressed market values in some cases and tax-efficient estate planning techniques that may disappear in the near future,” says Doyle.

The low interest rate environment is also hospitable to intrafamily loans, grantor-retained annuity trusts (GRATs) and sales to intentionally defective grantor trusts (IDGTs). These strategies, respectively, can reduce interest on loans, taxes on gifts to family members and your future estate tax liability.

Leverage Valuation Discounts

Another effective strategy is to take advantage of valuation discounts. That entails creating entities, such as LLCs and limited partnerships, and transferring interests to family members or into a trust for family members.

These transfers are discounted since LLCs and partnerships aren’t marketable assets or publicly traded securities in the same way stocks or bonds are. You can also receive a discount if you transfer a minority interest into an LLC or partnership.

“The [most important thing] is to get specialized professional advice and to establish a team of advisors,” Doyle says. “The key to all planning is flexibility to be able to address future changes in the law.”

As your income and assets grow, a range of strategies can help you preserve wealth. The right advisor, such as the experts at BNY Mellon Wealth, can help you craft a comprehensive and customized plan that ensures you’ll create a lasting financial legacy that will benefit your family for years to come.