Smart Decisions For Family Wealth Planning | One Smart Dollar (2024)

The primary concern for many investors is the amount of wealth they can transfer to the next generation. Wealth planning is complicated since the process involves tax planning, investment decisions, and possibly a business succession plan. Use these tips to create an effective strategy to accumulate wealth for your family.

Family wealth planning

A long-term financial plan includes estate and succession planning, as well as an investment plan to accumulate assets for future generations. Here are several key components of a family wealth plan:

• Investment planning: An investor must choose an investment portfolio based on a specific time horizon. It should also include the investor’s risk tolerance, and the cost of investing.
• Estate tax planning: Individuals who accumulate awealth of $5 million or more have an increased exposure to paying the estate tax when they pass away. A wealth plan must include strategies to minimize the impact of the estate tax.
• Succession planning: The investor must determine how assets will be distributed at death, and who will receive the assets. If you own a business, you can put a buy-sell agreement in place, so that your interest in the company can be sold at death. The proceeds from the sale can be distributed to your heirs.

Each of these factors should be addressed in order to implement an effective family wealth plan.

Accumulating assets

Your ability to accumulate investment assets over time determines the amount of wealth that you can transfer to your heirs. You should first consider your time horizon, which is the amount of time you have until retirement. Then consider your remaining life expectancy.

A longer time horizon means that that you can take on more investment risk. The reason is because you have time to make up for any losses you may incur. A person who is 20 years from retirement may take more risk than a worker who will retire in five years.

Also Read: Betterment: A Better Investment Method

Once you’ve determined your time horizon, you can estimate the amount of money you need to invest each month to meet a particular investing goal. Assume, for example, that you plan on retiring in ten years, and you need to accumulate an additional $200,000 over that ten-year period.

A financial advisor can help you estimate an annual rate of return on your investments, and use that rate to determine how much you should invest each month.

All investors can benefit from compounding interest, which refers to earning an investment return on both your original investment and any prior earnings you’ve accumulated. By reinvesting your earnings, your total assets can accumulate at a much faster rate.

After you have a plan in place to accumulate assets, you can consider specific investment options.

Stocks and bonds

Two of the most common investment options are stocks and bonds. You can buy stocks or bond issues individually, or invest in a mutual fund, which is a diversified portfolio of stocks, bonds, and possibly other investments.

Stock investors own a small percentage of a company’s equity, and equity owners can earn an annual dividend or profit from an increase in the stock price. Bond investors, on the other hand, purchase company debt and earn interest income each year. When a bond matures, the investor is repaid the principal amount of the bond.

Peer-to-peer lending

This is an investment vehicle in which investors finance loans to borrowers, and the loans can be used for business or personal use. Peer-to-peer lending allows a borrower to obtain financing without applying for a bank loan.

Marketplaces, such as LendingClub and Prosper, collect information from borrowers and create a profile that is reviewed by potential investors. The investor can decide whether or not to invest in the loan, based on the creditworthiness of the borrower. Peer-to-peer lending can provide an investor a 4% to 7% annual rate of return, and this form of investing allows the investor to diversify away from traditional stock and bond investments.

Investors are exposed to some level of default riskor the risk that the borrower will not make timely payment of interest and principal payments.

An important decision

Your decisions about wealth planning will have a huge impact on your ability to accumulate wealth and transfer assets to your heirs. Work with a CPA and a financial advisor to create a comprehensive financial plan, so you can have peace of mind.