In this episode of ThimbleberryU, we explore the concept of building intergenerational wealth. Amy Walls and Jon "Jag" Gay dive into the importance of ensuring your own financial independence before focusing on wealth for future generations. We begin by discussing the need to establish a solid financial foundation for yourself first, covering goals like education, retirement, and potential medical costs. This ensures that you’re not only able to support your family but also secure your own future, which is a crucial first step.
Once you’re financially independent, the next phase is about bringing together a team of professionals—a financial advisor, tax advisor, and estate planning attorney. These experts help create a strategic plan tailored to your specific financial situation and goals. Amy explains that intergenerational wealth-building strategies should focus on both tax efficiency and long-term growth, which often means taking a more aggressive investment approach with money earmarked for future generations.
Several financial tools can assist in this process. Amy mentions 529 plans for education, Roth IRAs for tax-free growth, and even life insurance policies that pass wealth tax-free. These instruments provide flexibility and potential tax advantages that help protect and grow wealth over time.
A significant aspect of wealth-building is education and passing down financial wisdom. As Amy points out, financial literacy is just as important as the money itself. Teaching children and grandchildren how to manage money responsibly, giving them opportunities to practice, and allowing them to make mistakes are crucial for ensuring that the wealth you’ve built doesn’t get squandered by future generations.
We wrap by emphasizing the importance of legal protections, such as insurance and estate planning, to safeguard wealth. From umbrella liability policies to updating estate plans regularly, it’s essential to have the right protections in place to ensure that your wealth transfers smoothly and securely when the time comes.
Amy encourages listeners to start planning today, whether they’re still in the dreaming phase or ready to take action, and to seek professional help to feel more confident in their decisions.
[00:00:00] Jon Gay: Welcome back to ThimbleberryU, I'm Jon Jag Gay, Amy Walls from Thimbleberry Financial joins me as always. Great to be with you, Amy.
[00:00:13] Amy Walls: Jag always good to be talking to you. I'm excited about this topic.
[00:00:17] Jon Gay: Yeah, because this is a topic that's really on a lot of people's minds lately. Building intergenerational wealth, whether you've just started thinking about it or you're ready to take action.
We'll jump right in, Amy. Where do people even start when they're thinking about building wealth for future generations?
[00:00:32] Amy Walls: Good question. So if you're thinking about building wealth for your kids or grandkids, the first thing you need to figure out is are you financially ready? It's important to start by taking care of yourself first, right?
I think this is either a dream or you're ready.
[00:00:49] Jon Gay: Okay.
[00:00:49] Amy Walls: And if you're still working on getting yourself financially independent, meaning you can cover all the goals that are immediate for yourself, and maybe even if you've, we're talking intergenerational wealth. So I'm going to assume you've got some kids. That's covering college and that sort of thing, that you're a hundred percent prepared for those things, then it's time to really start taking action around intergenerational wealth, rather than just doing the dreaming towards it.
[00:01:19] Jon Gay: That's a really good point. I think there's this natural compulsion on the part of parents to say, I can want for a little bit more. I just want to take care of my kids. I just want to make sure my kids are taken care of. But I'm glad you said that, in order to be in a position to take care of your kids or grandkids or however far you want to take it, your financial house, so to speak, really has to be in order first.
[00:01:40] Amy Walls: Yes, I like how you said that because it has to be in order, not on the track that I'm on track to reach my goals, but that I've already met them. I have the money to have met them because who knows what happens in the future that maybe takes you off track.
[00:02:00] Jon Gay: We've talked in our last episode about unpredictable medical bills or short or long term care in the future.
If you don't have that security for yourself, whatever you're trying to save for your kids is just going to come back to deal with that. So you really have to have financial independence before you start thinking about moving it along the line of the generations.
[00:02:20] Amy Walls: Absolutely.
[00:02:21] Jon Gay: So all that said, you are ready, you the listener, you are ready to do this.
What are the first steps?
[00:02:28] Amy Walls: Well. Once you're ready, the first step is to bring in the right professionals.
[00:02:33] Jon Gay: Sure.
[00:02:34] Amy Walls: You want a financial advisor, like me. I may not be the right one, and that's okay. But you want a financial advisor to lead the charge on this. You're also going to need a tax advisor and an estate planning attorney.
Building intergenerational wealth is a big goal.
[00:02:51] Jon Gay: Yeah.
[00:02:51] Amy Walls: It's a powerful, exciting goal. And you need to have these experts by your side, because it will make a huge difference in your efficiency and opportunity. Together, they're going to help you create strategy that works for you and your family, so that you know where you're headed.
[00:03:11] Jon Gay: If you had a very complex medical issue that was not limited to just your heart, just your lungs, whatever it is, you might be seeing multiple specialists in a hospital setting. This is the same here. You need to see the specialists who have their areas of expertise to work together to form the right plan for you.
[00:03:31] Amy Walls: That's a perfect analogy.
[00:03:33] Jon Gay: Okay, so you have the team in place. What's next?
[00:03:36] Amy Walls: You need that strategy in place that's going to focus on your goals and your circumstances. Your financial advisor on the team is going to take the lead on investment strategies and just overall strategy, but your tax advisor and estate planning attorney are going to help with that tax efficiency and making sure that wealth is protected.
For example, when it comes to investing, you might want to take a more aggressive approach with money that you know you aren't going to need during your lifetime. Perhaps at this point in your life, you're actually moderate in terms of risk, but of your overall portfolio, you've got that all covered of what you're going to need.
And you look at this and say, this portion is really intergenerational wealth. It's not expected to be needed for another 30 some years. I have my area moderate, but this I don't earmark for myself, so I actually feel like I can go aggressive with it, or moderate aggressive, whatever the case may be.
[00:04:40] Jon Gay: I'm going to make another analogy here, and that is we've talked in previous episodes over the course of your working years that you can be more aggressive in your younger years because you've got that longer runway than as you get closer to retirement. A lot of folks tend to be a little bit more conservative, a little bit more moderate.
This is the same thing, but on the next level. It's the short-term money being more moderate for you, but the longer term money that's going to go to other folks by the numbers, oftentimes you can be more aggressive with it.
[00:05:06] Amy Walls: Absolutely. And I think it's clear from how we're talking about it, but I want to make sure our listeners don't think, perceive that we're saying that, hey, At this point, you should be moderate. Risk tolerance is totally up to the person. I call it their ability to sleep at night.
As markets fluctuate, that's a personal thing. the moderate that we're using, for the person starting is just an example of a potential risk tolerance.
[00:05:32] Jon Gay: I'm glad you said that. What are some other options you might want to consider as you're thinking about building generational wealth, Amy?
[00:05:38] Amy Walls: So there's several options that someone might consider. Perhaps it is opening or funding a 529 plan to save for kids or grandkids education.
[00:05:47] Jon Gay: Yes.
[00:05:47] Amy Walls: So here's an example. A family that's doing very well, still working towards goals, but are very close to financially independent, inherit some money from grandma.
Okay, let's say, and they're trying to figure out what do we do with that? Do we just stick it in our brokerage account? We have plenty in there. The taxes are killing us. You are maximum funding 401ks. You're funding IRAs. Really, you're down to brokerage account and your kids have 529 plans funded.
You're doing that on a regular basis. What if you took a large portion of that inheritance and put it into the 529 plan for each of your kids?
Now, in this example, imagine that this is going to give you much more in the 529 plan than you ever expect your kids to need for college, right?
Especially imagine that your kids are maybe 8 years old or 10 years old, right? There's 8 to 12 years until they're going to touch that money where it has time to grow. So you look at that and say, college is definitely overfunded. But here's where this strategy can be a simple way of building intergenerational wealth.
That extra, when they're done with school, you can invest it more aggressively because it's essentially going to be for their kids.
[00:07:09] Jon Gay: Oh, wow.
[00:07:10] Amy Walls: So now you have, what, another 30 years, 25 years until that money is going to be used again? So it gets to compound and grow tax free future education be distributed tax free.
And you have the potential, what if one of your kids, if you've got two of them, and you do this, one of them doesn't have children, they can always reassign the money to nieces or nephews.
[00:07:37] Jon Gay: Okay.
[00:07:38] Amy Walls: it's a great, simple strategy to stretch dollars and protect them from taxes.
[00:07:45] Jon Gay: Love the 529 plan, what else?
[00:07:47] Amy Walls: Other things might be using Roth IRAs because they have tax free growth and withdrawals in retirement. Now, someone might be listening and saying, you might be saying to yourself, gosh, I already do that. This is an area where we see it might make sense to do conversions of IRA balances into Roth IRAs, even if you aren't the one who's going to get the tax benefit.
[00:08:11] Jon Gay: Right.
[00:08:11] Amy Walls: Because it's going to benefit the next generation. And perhaps your tax bracket is lower than their tax bracket.
[00:08:19] Jon Gay: That makes sense. Okay.
[00:08:20] Amy Walls: So the whole idea here is to use tools that help you grow wealth while minimizing taxes. And that's where your financial advisor and your tax advisor are going to work together to find those opportunities.
[00:08:32] Jon Gay: Absolutely want to rely on those professionals, but specifically right now.
Any ideas on how to make sure the plan is tax efficient? Generally speaking?
[00:08:40] Amy Walls: Absolutely. One of the best ways to be tax efficient is to think ahead, right? This isn't something you do willy nilly. I have an idea. I'm going to do this. So perhaps it's that you start gifting- air quotes around- "gifting" assets during your lifetime to reduce your taxable estate, or maybe it's that you even set up a life insurance policy to pass wealth down to the next generation tax free.
I say that. Because life insurance death benefits pay out income tax free. So it's a great way to use leverage to have liquidity and to build wealth. Your state planning attorney and financial advisor together can help with this. And then, simple thing but easy to overlook is to consistently make sure your estate plan is up to date.
Now consistently doesn't mean monthly. But every year, couple years, verify, meet with your estate planning attorney to make sure it all still works. So that, wealth is going to transfer smoothly when the time comes.
[00:09:48] Jon Gay: So now we have the strategy in place. How do you figure out the kind of legacy you want to leave, Amy?
[00:09:53] Amy Walls: Oh, Jag, this is such an important question. When you're thinking about your legacy, you've got two choices. You can either really let it happen by accident or you can be intentional about it. And I think for, the purpose of this podcast, we're going to go with people are trying to do this. So the intentional approach is the one we want to talk about.
And it's all about aligning your wealth with your values. It's deciding what's most important to me. Do you want to make sure that your kids and grandchildren are financially secure? Obviously, if you don't care about that, building intergenerational wealth is more of, oh, a thing I think I should do.
There's not really passion about it. And it's probably going to be harder to ensure that wealth actually continues. We can talk about that. Another question to ask is, do you want to leave a charitable legacy? That may not be intergenerational wealth, but it can be. Family foundations are a great way to do charitable work and pass money to the next generation. So knowing what's important to you is where this starts.
[00:11:01] Jon Gay: Okay, so how do you make sure this is of an important value to you? How do you make sure those values will stick with the next generation?
[00:11:09] Amy Walls: Good question, Jag, because what's important to me, if you're my spouse or my child, it may not matter to you, right?
We all have different experiences that lead us to different places. But I'm going to go back to intentional on this because trying to get those values to stick, there's no way we can guarantee it. It's all about teaching financial responsibility.
[00:11:30] Jon Gay: Yes.
[00:11:31] Amy Walls: You have to pass down more than just money. You have to pass down wisdom that comes with managing it.
Think of how you learn to do things like tie your shoes or ride a bike. Okay? It took practice, right? The same goes for teaching kids and grandkids about money. You've got to talk about it regularly, and that's hard these days when it's hidden. Everything is online. You have to consciously, intentionally, say, I'm going to be teaching.
I'm going to be having conversations to help them get used to this. You have to show how you manage it. And most importantly, you have to give opportunities for them to practice. And you've got to be okay letting them make mistakes.
[00:12:16] Jon Gay: That's the hard part for parents. Yeah.
[00:12:18] Amy Walls: Yep. I think for anybody, If you think about when you have learned the most, the biggest lessons you've learned in life, I would be willing to bet money on the fact.
That they came from mistakes you made.
[00:12:32] Jon Gay: It's that old analogy, there's not success and failure, there's success and learning opportunity.
[00:12:37] Amy Walls: Exactly. they have to be able to fail and then not be bailed out, but learn how to dig themselves out from that failure. it's failing successfully.
[00:12:48] Jon Gay: Oh i like that yeah financial literacy is so important i know here in Michigan they just passed a law to mandate a financial literacy course in high schools and that's going to be so important because i know people in my life. I'm sure you do too, Amy, where the parent leaves the child a lot of money but doesn't teach them about money and how to be responsible about it and they blow the money and now the money is gone. And they're up a creek should be blunt about it.
[00:13:15] Amy Walls: Absolutely. Yeah, it's like winning a lottery with not being prepared.
[00:13:20] Jon Gay: Yeah, so teaching these lessons really is important, but what else should people be doing to protect their wealth after it's built?
[00:13:27] Amy Walls: It's really about legal protections and insurance. Okay. I know insurance isn't a fun topic, but let's talk legal protections first.
Certain retirement accounts can offer strong protections from creditors. That's important to note. It can matter where you put money, especially if you're at risk for lawsuits.
[00:13:46] Jon Gay: Yeah.
[00:13:48] Amy Walls: With our healthcare workers, this is especially strong and our tech clients, it's something we have to be very aware of.
You also need to make sure you have the right insurances in place, things like umbrella policies for extra liability protection, right?
[00:14:00] Jon Gay: Yep.
[00:14:01] Amy Walls: If kids have friends over and they break a bone, you hope That the parents are all reasonable, but when opportunity arises, sometimes people aren't quite as reasonable as they seemed.
[00:14:12] Jon Gay: True.
[00:14:12] Amy Walls: And then life insurance, as I talked about, can be a great way to pass wealth to heirs tax free. And then protection is also about estate planning. And so you got to make sure, like I've said earlier, to keep that estate plan updated and make sure it reflects your wishes.
[00:14:29] Jon Gay: Yeah, Amy, we've covered a lot of ground today, a lot of things to consider when it comes to building generational wealth.
Before we wrap up, any final pieces of advice for someone just starting to think about building intergenerational wealth?
[00:14:40] Amy Walls: Whether you're in the dream spot or the ready now spot, my advice is start today. Okay. Because even if you're in the dream spot, starting today, while we didn't talk about it, looks like preparing yourself personally.
And so in either case, there are steps you can take, there are different paths, but the earlier you begin, the more time you have to grow well, and start teaching that next generation. And then don't hesitate to get help. We obviously talked about why this team of advisors, different kinds, is important.
Building intergenerational wealth can feel overwhelming. What's the right choice? Am I doing this at the right time? Lots of questions. So those advisors should be able, if they're the right people, to help you feel more confident in your decision making.
And speaking of advisors, if somebody wants to talk to you and your team at Thimbleberry Financial about building intergenerational wealth or anything related to their financial future, how do they best find you?
They can find us online at thimbleberryfinancial.com or by giving us a call at 503 610 6510.
Really good stuff, Amy. We'll talk
again soon. Sounds great, Jag. Look forward to it.
[00:15:53] Jon Gay: Securities offered through registered representatives of Cambridge Investment Research, Inc., a broker dealer member FINRA SIPC.
Advisory services through Cambridge Investment Research Advisors, Inc. A registered investment advisor, Cambridge and Thimbleberry Financial are not affiliated. Discussions in this show should not be construed as specific recommendations or investment advice. Always consult with your investment professional before making important investment decisions.
Securities offered through registered representatives of Cambridge Investment Research, Inc., a broker dealer member FINRA SIPC. Advisory services through Cambridge Investment Research Advisors, Inc., a registered investment advisor. Cambridge and Thimbleberry Financial are not affiliated.