SHORT ANSWER: Generational wealth is when families pass down assets, such as investments, a business or other financial resources, to the next generation.
As you consider your legacy, you might ask, “What is generational wealth and how can I help build it in my family?”
In its simplest definition, generational wealth builds when families pass down assets from one generation to the next, continuing each generation’s ability to maintain a certain lifestyle. Those assets can include property, a business, stocks or other items of value. Learn more about the topic and how to build and safeguard it for your family for generations to come.
What Is Generational Wealth?
When you pass on your assets to a younger family member, you can help build generational wealth. With the baby boomers aging, experts anticipate a great transfer of wealth, totaling $14 trillion throughout the 2020 decade.
Many families are focused on preserving their wealth from one generation to the next through continuing to invest the assets and use them wisely. However, first-generation wealth commonly shrinks significantly before reaching the third generation because of poor management or lack of foresight into sharing those assets with the next generation. By learning more about the topic and how to preserve assets for future generations, you can ensure you are building a strong inheritance for future generations.
How Is Wealth Transferred Between Generations?
Most generational wealth transfers after the owner dies. But other wealthy individuals choose to transfer the wealth in other ways. Here’s a look at your options when evaluating the best way to share your assets with future generations.
- Inheritance: Upon a person’s death, they can transfer their assets to loved ones via inheritance. In most cases, families see a transfer of approximately $50,000, making most inheritances simple and not something that will build generational wealth. You might hear this also called settling an estate plan after a loved one dies. Money given as an inheritance is not often called generational wealth, which is more commonly transferred while the owner is living.
- Gifts: Individuals might choose to begin transferring their wealth while they are still living to watch their loved ones enjoy it. In that case, they might write a check each year or set up a trust fund for their family to transfer the wealth in the form of gifts. In some cases, that looks like purchasing large assets for the family member, such as a home or vehicle. In others, it is in the form of cash or investments that they transfer slowly. Families with a business might retire and give management and ownership of that business to a younger family member.
- Educational expenses: Paying for education expenses is a common way to transfer wealth. Money that a loved one uses to pay for a family member’s tuition is tax-exempt, which is another perk of transferring wealth in that manner, though expenses related to books and room and board are not tax-exempt. Providing a wealth transfer in this way also can ensure that the next generation protects the wealth for future generations by having the knowledge and skills to do so or a good-paying job to add to the generational wealth.
- Medical expenses: Much like educational expenses, paying for medical expenses is another way to transfer wealth without paying gift taxes. That makes it an attractive way to help family members financially.
What Amount of Wealth is Considered Generational?
There is not a specific dollar amount or asset value that constitutes generational wealth. By definition, this wealth simply has to be passed from one generation to the next. But there has to be more wealth than the second generation needs to live comfortably.
For example, if the first generation were to pass along just $100,000 and the second generation did not need those assets to live comfortably, they could pass that $100,000 to the third generation, or invest it and help it grow to $110,000 to share with a third generation. While it is a nice chunk of money, it isn’t the millions of dollars you might envision “wealthy” families passing down.
In contrast, the $1 million passed down to the second generation who spends it all might not be considered generational wealth because it isn’t passed on to future generations or invested to grow.
To pass wealth, families need a large sum of money to start and then smart money management skills and investments to continue growing those funds for future generations.
How Do You Know if You Have Generational Wealth?
You know you have generational wealth when you can provide a good life for the next generation. When future generations don’t have to worry about the costs of items or struggle to make large purchases, you’ll know you have generational wealth.
Some signs you are building generational wealth include:
- You’re helping to educate your children on good financial habits and how to manage and pass down wealth. This includes avoiding debt and making strategic moves in investments.
- You have a business that you’re growing and training younger generations to run to pass it down to them.
- You regularly invest your money and add funds to your investment account throughout your life to help it grow each decade.
- You have a good life insurance policy that you maintain. The policy has a strong death benefit to help pass funds to your children or grandchildren.
- You regularly review your financial behavior with an adviser and look for new investment vehicles to help grow your wealth.
Your accounts have beneficiaries to ensure your wealth will transfer upon your passing without getting caught up in courts to decide who the wealth should go to. Having a will also ensures the funds transition the way you plan. Estate planning can ensure you have beneficiaries on accounts and strong financial moves.
Examples of Generational Wealth
Want to learn from others who have built generational through passing on a financial asset? Here’s a look at how notable families have shared their wealth and helped nurture it for future generations.
1. The Rockefeller Family
John D. Rockefeller founded Standard Oil. He turned that small investment into a fortune for his family because he diversified his investments, built a trust to help pass along the funds with minimal taxes and put a great value on education in his family. By emphasizing the importance of education, he ensured future family members had the means to continue to grow their financial assets.
2. The Kennedys
Joseph Kennedy Sr. invested in business ventures and the stock market. He diversified through real estate holdings and had the foresight to get out of the stock market before it crashed in 1929, which created the Great Depression.
3. The Walton Family
Their net worth is estimated at $267 billion, which makes them one of the richest families in America. That wealth came from their stake in Walmart Inc. The family still holds an estimated 45% stock in Walmart and family members serve on the board. Strategic moves, such as owning major sports teams, have helped the family maintain and grow their wealth.
How to Build Generational Wealth
Your family can live comfortably when you pass wealth on and provide good training and skills in money management. Having assets to invest can help sustain families with a more comfortable lifestyle. Here’s a look at how a family can build intergenerational wealth and pass it along to build the comfort and lifestyle families want.
1. Build Savings
To generate wealth, you’ll need to save money that you can invest strategically. Set aside funds for future generations in your savings or investment accounts. Once you have enough savings, you can work with a financial adviser to help those savings grow over time to make it a nice sum to pass along.
You don’t want to leave your savings sitting in a bank account where it isn’t growing or even keeping pace with inflation. The money needs to be earning good interest rates to help it grow to ensure a strong financial future for your family.
2. Buy Real Estate
Real estate tends to appreciate at faster rates than a savings account. With one investment property, you can build your financial assets to pass on to future generations. While real estate values do fluctuate and can still pose risks for investors, it’s still a good strategy for growing generational wealth that will pay dividends for decades to come for each generation.
3. Purchase Stocks
Stock market investments are a good way to help funds grow and build passive income. Passive income can help protect funds from inflation but investments do carry some risks. Choosing smart mutual funds or exchange-traded funds (EFTs) can be less risky options for protecting generational wealth.
4. Start a Business
Businesses with strong formation and good market positioning can help make money for your family for generations. Not only will you provide wealth for your family but you’ll also provide a career for family members. The ongoing income and revenue from a business is a great way to build generational wealth because you know the next generation can’t just squander all funds and leave no legacy for future generations. You just have to ensure that the family members you pass the business to have the know-how and skills to continue running it.
5. Protect Your Family with a Life Insurance Policy
A life insurance policy is not some sort of get-rich-fast scheme. You can use a life insurance policy to help ensure your family’s comfort upon your passing.
Taking out a large policy can be a wise decision if you are the brains behind the family business and worry that it might take some time for future generations to get good at managing it. Or it can be wise if you want to give family members time to get good at managing investments to keep growing your family wealth.
In some families, a large life insurance policy can be the start of generational wealth because the second generation uses the policy wisely by making strong investments. Plus, life insurance policies do not face estate taxes like traditional inheritance, which can make them a strategic vehicle for transferring wealth.
Be the Start of Your Family’s Wealth
Generational wealth has to start somewhere. You can be the first of your family to pass on generational wealth to build a strong future for the next generation. Start building generational wealth now through smart financial moves and investments that help grow your net worth to pass along and by investing in your children’s and grandchildren’s education to ensure they have a strong future.
