a smiling couple looking out the window of a vacation home on a lake knowing they have done what they can toward wealth preservation and wealth management

What Is Wealth Preservation?

Investors with generational wealth to grow and nurture need to ensure they have balanced portfolios that value security to preserve their wealth and legacy.

Key takeaways:

  • Preservation is concerned with more than growing wealth, and also involves understanding how to avoid big losses through balanced investments.
  • Tactics like spousal lifetime access trusts, Roth IRAs, and maximizing 401(k)s can be wise.
  • Alternative methods including real estate, private equity, and offshore investments are also smart for wealth preservation.

Any investor knows a smart investment strategy requires the right balance of risk and reward. The scale is tipped particularly toward security when dealing with wealth preservation, specifically how to avoid significant losses to the wealth one has built in times of market uncertainty. It is a critical component of wealth management, as is creating an investment strategy that will lead to growth and legacy preservation.

This guide walks through the basics of this important financial management concept and provides tools and alternative solutions for investors.

How is wealth preservation different from growth?

A family’s financial legacy is always evolving because the markets themselves are constantly in flux. It can be a tricky balancing act to maintain financial security while also preserving what they have accrued. Preserving wealth is concerned with securing the legacy a family has built with the right strategies, more than taking big risks, and requires a carefully balanced approach.

Here are some basics to know about preserving wealth:

  • Diversify
    It is a good idea to spread your resources into multiple investments and allocate some to bonds and cash to lower risk. The portfolio should have a mix of riskier investments to see faster growth and safer investments to protect against potential losses. This also ensures that, when the market changes, investors do not lose everything.
  • Use the two-bucket system
    A “wealth generation” bucket can be used to take chances on higher-risk investments. A “wealth preservation” bucket can be stocked with more reliable, long-term investments. As returns from the generation bucket grow, investors can transfer them into the preservation bucket.
  • Create a trust
    Certain trusts allow family members to exclude assets from federal taxation. Different kinds of trusts enable individuals and families to pass on wealth to heirs while mostly avoiding lifetime federal gift and estate tax exclusions, for example.
  • Monitor spending
    Investors and their families may not always be aware of their spending habits, but everyday spending is one thing people can control. Investors should consider changing spending habits particularly when the economy is uncertain to preserve wealth.

To paraphrase an old adage, it is harder to dig out of a deep hole than to leap out of a shallow one. A balance of volatility and stability is key to growing as well as preserving wealth, and a financial advisor will play a key role in ensuring the family knows which steps to take for their unique goals.

4 tools for wealth preservation goals

There are many traditional and alternative wealth preservation and management tools available that might be worth considering for a family’s strategy. Let’s dig deeper into available solutions investors may not be aware of:

  1. Spousal lifetime access trusts (SLATs) – A SLAT is an irrevocable trust that allows one spouse to make a gift to the other spouse (or other family members). This removes assets from the combined estate, reducing its taxable value. SLAT gifts are typically not taxable since the donor uses a federal gift and estate tax exclusion. Any post-gift appreciation happens within the trust and is also excluded from the combined estate.
  2. Shift away from cash – With interest rates still high, it may be worth considering transferring some cash incrementally into bonds, U.S. treasuries, or CDs, where yields are typically higher. These funds are safe within these accounts, and they will also accrue interest over time.
  3. Convert to a Roth IRA – After-tax contributions to a Roth IRA grow tax-deferred and can be withdrawn tax-free down the road, during retirement. Once the investor meets the qualifying holding period, converting a 401(k) or IRA to a Roth IRA means earnings continue to grow, no matter how high inflation or taxes may be.
  4. Maximize 401(k) savings – Many people think they need to stop once their contribution to a workplace 401(k) is maxed out, but that is not always the case. It may be possible to invest additional money through an employer match and after-tax contributions, for example. For 2023, this has a maximum of $66,000 ($73,500 for those age 50 and older).

The more tools investors have at their disposal, the better equipped they are to augment the impact of their wealth. A financial advisor would be a great resource for learning more about the available options.

Alternative investment methods for preservation

Investors who are looking for further diversification of assets may want to consider alternate investment classes. Each has its own perks and pitfalls, and every investor is unique, so the right combination of asset types will also need to be tailored to the exact situation.

It is also important to note that these classes tend to be illiquid assets with longer investment time horizons. Here are a couple of examples:

  • Real estate
    Real property generally appreciates over time, so this is considered to be a more conservative investment strategy – even in volatile markets. There are many ways to get started, such as commercial real estate, rental income from multi-family properties, or real estate investment trusts (REITs).
  • Private equity
    Investors can put their money into private companies rather than those traded on public markets. This provides access to market segments and investment opportunities that would otherwise be unavailable.

A strong portfolio ideally has a mix of different liquidities and time horizons, which spreads out risk. These alternative investment options are good tools for this diversification, and a wealth advisor can help investors determine what the right mix will be for their wealth preservation and management goals.

International wealth preservation strategies

Another alternative method to preserve wealth is offshore investing. Here are some of the benefits:

  • Legal action costs more
    Any creditor claims or other lawsuits are much more expensive to pursue in another country than they would be in the U.S. This could mean fewer claims filed simply because of the added costs and hassles that creditors want to avoid.
  • Tax benefits
    Some countries outside the U.S. want to bring in more investors to stimulate their economies, so they offer certain tax advantages – such as lower tax rates – for international investors.
  • New investment opportunities
    Offshore investments can provide unlimited access to all major exchanges and international markets, some of which are not available to U.S. investors. This creates additional opportunities for investors.

The many advantages of offshore investments make them a useful option in managing a diverse portfolio. They may also fit in nicely with the other tactics an investor has implemented to preserve wealth.

Work with the right wealth preservation partner

Wealth preservation goes beyond growth and requires careful planning and a diverse portfolio. Ensuring investors balance risk and security – and getting creative with options like real estate – will help them preserve what they have built.

Working with an advisor from Lindberg & Ripple can help investors and families create wealth preservation strategies that will optimize financial planning. Contact the team today to get started with customized solutions.

This material and the opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual or entity. To determine what is appropriate for you, please contact your Lindberg & Ripple Financial Professional. Information obtained from third-party sources are believed to be reliable but not guaranteed.

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