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Many people not only dream of being financially secure, but of leaving a lasting financial legacy for their loved ones.
Whether it’s real estate, investments, or a business, you may have a goal to acquire assets and pass them on to family members. However, building generational wealth requires some forethought and a solid plan of action.
To help you get started, here are some tips for how you can lay the foundation today to build a better financial future for your family tomorrow.
Invest early — and often
Investing is one of the most effective ways to build wealth, even during uncertain economic times. Working with experienced financial professionals can help you map out the right investment strategy.
“During times of market volatility, it’s important for an investor to work with an experienced team to assess their investment goals and risk tolerance, time horizon, cash flow needs, and current asset allocation,” says Tom Dicker, New England market leader for PNC Private Bank. “Working with your team to stress test a cash flow analysis and financial planning projections can provide valuable insight as to how they are on track to meet their goals in various market environments.”
It’s also crucial to think about diversification. While most people have access to an employer-based 401(k) retirement plan, they also can consider opening a brokerage or investment account for more flexibility or a health savings account (HSA) if they have a high-deductible insurance plan. A brokerage account doesn’t come with the same age restrictions on withdrawals as traditional retirement plans, most of which only allow penalty-free withdrawals after age 59.5. An HSA acts like a 401(k) and gives you another way to save for retirement. It also offers a triple tax advantage: you can contribute tax-free, enjoy tax-deferred growth, and make tax-free withdrawals if you use the money to pay for qualified medical expenses.
Minimize your tax exposure
When building wealth, you can’t forget about taxes. It’s important to have a flexible wealth-building strategy that considers changes in tax law. For example, the IRS has a new 10-year rule for inherited IRA withdrawals, and several beneficial tax provisions within the 2017 Tax Cuts and Jobs Act are set to expire at the end of 2025.
Dicker says you can find ways to offset taxes while giving back to worthwhile causes. You can use a charitable lead trust (CLT) to give a charity a stream of payments for a specific term and potentially receive a tax deduction for the full value of the gift to the CLT.
To minimize taxes when transferring wealth, you also can consider a grantor-retained annuity trust (GRAT), Dicker says. A GRAT allows individuals to transfer assets to the next generation without gift tax — as long as the assets appreciate over IRS Section 7520 interest rates. The rules around this can get complicated, so it’s recommended to talk to a financial advisor if you want to explore this option.
Diversify your portfolio with real estate
Real estate offers so many avenues to build wealth, especially for younger generations.
Ashley Hamilton, a licensed real estate agent, investor, and coach, started her wealth-building journey through real estate when she was a 22-year-old single mother of two. Hamilton used her tax refund to buy her first property for $6,300 in 2009. In the last 13 years, she has built a 66-property portfolio of single-family rentals and an apartment building in Detroit.
Hamilton has used what’s known as the BRRRR method (Buy, Rehab, Rent, Refinance, Repeat) to build her rental portfolio. She says other young people who are considering real estate investing should make sure they have good credit, which can help them access better loan rates to purchase more properties. The cash flow from rentals can generate passive income you can use to buy more properties or invest elsewhere. You also can deduct the costs of buying and improving rental real estate.
“You’re not working for it [passive income],” Hamilton says. “You have so many other benefits, like somebody else is paying your debt down for you. You’re accumulating net worth because you own an asset now that you can leverage. You’re also getting depreciation, so you’re saving on taxes.”’
Crystina Cardozo, a financial literacy consultant and real estate investor, has focused on short-term rentals in tourist areas. This strategy has allowed Cardozo and her husband to invest in affordable real estate outside of the expensive housing market in New Jersey where they live. They own rentals in Wisconsin, Missouri, and Pennsylvania.
Though people can invest passively in real estate through crowdfunding platforms or real estate investment trusts (REITs), Cardozo says she prefers being a landlord.
“You’re kind of limited on how much your return on investment is going to be. Whereas when you have more control, there are more things you can offer. There are more things you can do to make your property stand out,” she says. “I’m really looking at a 30% cash-on-cash return and those are just not numbers you would typically see in a REIT or crowdfunding type of transaction.”
Consider starting a business
In 2021 alone, the federal government received 5.4 million new business applications.
Many of these people may have flocked to entrepreneurship because of the autonomy, but Dicker says starting a business also can accelerate wealth building.
“Business ownership represents 34% of non-financial assets, according to the Federal Reserve. In other words, it is a major component of family wealth,” he says.
There’s a high failure rate in business and that can prevent some entrepreneurs who fail on their first try from starting future companies, so “perhaps one takeaway from this is that while failure is not the end, it’s always important for entrepreneurs to look before they leap,” Dicker says.
One way entrepreneurs can soften their landing? Write a comprehensive business plan. A business plan can help first-time entrepreneurs get much-needed funding, but more importantly, it can serve as a roadmap that outlines their goals and that they can revisit every year to ensure they’re still on track.
Protect your wealth with a will or trust
Once you build wealth, you’ll need to protect it.
Everyone 18 and older should at least have a will. A trust also allows you to dictate where your assets go and avoid a costly, lengthy probate process — a legal proceeding where the courts appoint an executor for an estate and decide how to distribute the estate’s assets.
“For individuals with dependents, it’s important to have a trust and will established so that their estate is distributed to their heirs or guardians at the time of their death,” Dicker says. “A will also allows them to appoint an executor to their estate so they can oversee the distributions of assets and carrying out their wishes.”
Taxes are one important consideration with trusts. Investments held in trusts may have a high tax rate and beneficiaries may not receive what’s known as a step up in basis, or a more tax-favorable transfer of the assets, depending on how the trust is set up.
Dicker says it’s also wise to have a living will and appoint both a financial and healthcare power of attorney. A living will allows you to share what end-of-life treatment you would want or not want to receive. You also can designate someone you trust as your healthcare power of attorney, which would give them the legal authority to make medical decisions on your behalf if you no longer had the capacity to do so. If you own property or other assets, appointing someone as your financial power of attorney would give them the authority to pay bills, make investment decisions, deposit money, and execute other financial activities on your behalf if you aren’t able to handle these tasks yourself.
Experts say it’s important to review all these documents every three to five years to ensure they continue to reflect your wishes.
Progressing Your Wealth-Building Journey
Whether it’s through a trust, starting a business, investing in real estate, or the stock market, building and preserving wealth is a journey that can start at any age. But with a holistic approach, the right team of expert advisors, and a long-term, yet flexible plan, you could leave behind assets that transform your family’s financial future.
The PNC Financial Services Group, Inc. (“PNC”) uses the marketing names PNC Private BankSM to provide investment consulting and wealth management, fiduciary services, FDIC-insured banking products and services, and lending of funds to individual clients through PNC Bank, National Association (“PNC Bank”), which is a Member FDIC, and to provide specific fiduciary and agency services through PNC Delaware Trust Company or PNC Ohio Trust Company. PNC does not provide legal, tax, or accounting advice unless, with respect to tax advice, PNC Bank has entered into a written tax services agreement. PNC Bank is not registered as a municipal advisor under the Dodd-Frank Wall Street Reform and Consumer Protection Act. “PNC” is a registered mark and “PNC Private Bank” is a service mark of The PNC Financial Services Group, Inc. Investments: Not FDIC Insured. No Bank Guarantee. May Lose Value. ©2023 The PNC Financial Services Group, Inc. All rights reserved.
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