Follow me:

Investing For The Next Generation

Have you had wealthy friends or family members pass away and later on you find out the only thing they left their heirs was debt?

It’s more common than you think and it could have been avoided with simple planning.

One of the most common mistakes wealthy individuals make is to gift highly appreciated assets to their potential heirs in their lifetime. Along the same lines, some individuals will add their heirs as co-owners to similar highly appreciated assets.

The problem is that when ownership passes while the donor is alive, the recipient receives the asset at the donor’s original cost basis. This is true with appreciated assets such as real estate as well as stocks.

Gifting or re-titling assets in your life may be convenient but the tax ramifications can be significant.

That’s because if you wait to pass appreciated assets to your heirs after your death instead of during your lifetime, your heirs will receive the assets at a “stepped-up” basis equal to the fair market value of the property at the time of the owner’s death.

Let’s say the original basis of an asset was $100,000 and is worth $500,000 at the time of the owner’s death. If the owner’s daughter was on the title of the property as co-owner at the time of the owner’s death, if she decides to cash out after her father’s death and sells the asset for $500,000 she would be on the hook for $400,000 in capital gains tax.

If on the other hand, the title did not pass until the death of the owner, the daughter would receive the asset at a “stepped-up” basis equal to the current fair market value of $500,000. If she then decided to immediately sell it for $500,000, she would be responsible for no tax.

The right and wrong planning can mean the difference between a $100,000 inheritance and one worth $500,000.

Now, what if there were a $200,000 loan outstanding on an inherited property?

In the first scenario; instead of a $100,000 gain, the heir would now have a $100,000 deficit upon sale. In the second scenario, the heir would receive $300,000 after paying off the loan, which still puts the heir in positive territory.

That’s how a wealthy person can leave their heirs with debt.

Ultra-wealthy investors are too savvy to make mistakes like the simple ones described above. That’s because they invest in a long-view. They look at their actions and analyze the ramifications of their decisions on not only the next generation but for generations to come.

The ultra-wealthy have all the money they need for their lifetimes. Their overriding focus and concern are to preserve multi-generational wealth.

They want to maintain their legacies and in order to ensure their objectives are accomplished for the long-term, they implement safeguards – both through legal and practical such as through education – to ensure a lasting legacy.

Take, for example, 1031 exchanges…

With the right planning, the proper legal safeguards, and appropriate education of you heirs, you and multiple generations of your heirs could reap the tax benefits of the 1031 exchange in perpetuity.

1031 exchanges allow the owner of an appreciated piece of commercial property the ability to continually exchange the property for “like-kind” property until the time of death and beyond to avoid capital gains tax.

This so-called “swap ‘til you drop” strategy has been used by the ultra-wealthy for decades to reap the cash flow rewards of commercial real estate while deferring the tax liabilities from appreciation.

If you make the mistake of transferring title in a 1031 property in your lifetime, the heir will receive the property at your original cost basis. However, if you wait to transfer the property at death, just like in the non-1031 example above, your heir will receive the property, not at the original cost basis, but at the “stepped up” basis equal to fair market value at the time of death. What’s the benefit?

The benefit is that if your heir decides to sell the property, they’ll be on the hook for less tax than if they had received the property during your lifetime.

If you properly educate your heirs during your lifetime and pass on your investing wisdom and knowledge, chances are your heir will decide to keep the commercial property instead of selling it in order to preserve it for future generations while continuing to reap the income benefits of the commercial asset during their lifetime. Then at their death, they’ll pass it on to their own heirs and so on and so on.

Each successive generation will continue to receive the 1031 property at a “stepped up” basis – thereby deferring capital gains tax until the property is ultimately sold.

Theoretically, the cash flow and tax benefits of the 1031 property can continue in perpetuity – rewarding generations upon generations of heirs for multiple lifetimes.

The ultra-wealthy don’t invest like the average investor:

    • They invest in a long-view by keeping their eye on the prize.
    • They don’t speculate and don’t leave their fortunes to chance or outside economic forces like volatility and inflation.

That’s why they avoid Wall Street and turn to tangible private assets that are insulated from market volatility and shielded from the corrosive effects of inflation.

Investing for the long-term whether individually or with like-minded co-partners through an investment fund ensures stable, consistent returns with growth shielded from compulsive selloffs through long lockup periods and built-in and institutional illiquidity.

    • To preserve wealth for future generations invest with a long-view.
    • Impart your knowledge to your heirs to ensure the long-term viability of your wealth and legacy.
    • Investing with a long-view will help you avoid short-term mistakes that can cost your heirs millions.

Further reading

Boomer Retirement Crisis: How To Avoid It

The approaching retirement wave can be disastrous, with many retiring boomers expressing distress over being unprepared financially. According to a new survey, many boomers find themselves in a retirement crisis as they struggle to compete with the...

Ignore the Hype and Protect Your Portfolio

Billionaire Larry Fink recently made headlines when he declared that he was more optimistic than ever about the stock market. He says investors should be 100% in equities presently if they can handle it. That’s crazy talk. Stocks don’t even make the...

EVs and Lessons in Demand

How many times have you heard a revolutionary industry, product, or market was a “sure thing” or a “can’t miss?” Once the darling of Wall Street, electric vehicles and the cottage industries that sprung up around them are no longer a sure...

Investing Goals for 2024

What is your investing ethos?  What are the guiding beliefs or principles behind your investments or your approach to money? What motivates you when you invest? Do you have an investing ethos, or do you even put much thought into your investments or...

New Investment Goals for 2024

Change… The past few years have seen some major developments across the globe that have reshaped our world and touched almost every part of our lives. You can almost mark the date when things started to change drastically across the globe. January...