Table of Contents:
- How is generational wealth passed down?
- Ways to build generational wealth
- The benefits of creating generational wealth
- The bottom line
Generational wealth isnt a new concept, and you may have already heard the term, but do you know what it means and why its important? According to MarketWatch, the generational wealth definition means assets are passed down from one generation to the next generation, and so on.
These financial assets can be in the form of money or property, such as an inheritance, a family business, real estate, stock market investments, life insurance benefits, or anything else with a monetary value.
If youre not the recipient of generational wealth, you may know someone who is. Maybe they may have avoided student loan debt for their college education, car payments, rent, or other debt obligations incurred as young adults. As beneficiaries of financial assets from parents or other family members, they are able to generate even more income that can be added to the family net worth to pass down.
Although tangible assets are the marker for generational wealth, it also comes in other forms like education about personal finances, such as budgeting, purchasing real estate, and investing in stocks.
Building generational wealth takes a lot of work, and maintaining it is even more difficult. Each generation has its own problems and challenges, and one wrong decision can easily impact future generations.
According to Nasdaq, for those who build generational wealth, about 70% lose it by the second generation. By the third generation, 90% have lost it, which doesnt offer very favorable odds.
So, what happens?
- Many families are uncomfortable discussing money with their children, which doesnt prepare them to carry on generational wealth.
- Family members may not want to bother learning about finances and go through the money available without understanding the implications.
- Parents may be worried about their childs work ethic or abilities to pass on their wealth.
- The younger generation may want to go their own way and not deal with family expectations.
To pass on generational wealth, its important to have open communications surrounding money as well as adequate planning so the younger generation understands the importance of building wealth.
Unfortunately, many parents dont want to burden their children with a scenario where they have passed on and the plans that need to be made, so the kids are left to figure it out themselves, which doesnt always come easy.
Key takeaways
- Generational wealth refers to the passing of assets from one generation to another.
- Even when saving for retirement, you can begin creating generational wealth.
- Although assets may pass on by inheritance after ones death, a trust allows them to be transferred when the owner is still alive.
- Building generational wealth can be done in a variety of ways, including with real estate and business ownership.
- Building generational wealth can help family members achieve the average net worth by age, which is a good indicator of overall financial security.
How is generational wealth passed down?
As you may expect, for Americans, most second-generation wealth recipients receive it from an inheritance. This wealth may come when a parent or relative passes on with assets listed in their will or a trust.
- They can be any tangible assets that include cash and investments, property and real estate, a family-owned business, jewelry, art, or other family collectibles.
According to the Board of Governors of the Federal Reserve System, as of 2018, while most American families (55%) inherited assets under $50,000, theres 2% who exceeded $1 million with more than 40% accounting for all money passed down.
Death isnt the only way wealth is passed on. It can also be passed onto future generations through the following ways:
- Financial education – For some reason, financial education doesnt seem to get much attention in families. Yet, its one of the most important things to learn and understand. We all need money for basic life needs like food and shelter, but many families treat it as taboo. Educating your kids about wealth management can help them be financially successful and allow you to pass on wealth to your children.
- College funds – Paying for a college education can make a significant difference to a recipient of generational wealth, allowing them to be free of loans upon graduation, giving them a head start in investing, having a down payment for buying a home, or other income-generating activities.
- Gifts – These can be in the form of cash, property, or other items and can be used to purchase a first home or start a business.
- Marriage – Marrying into a wealthy family can provide various opportunities that would be unattainable otherwise.
- Business ownership – Transferring the ownership of a business can allow the next generation to learn from and run the family business.
Additional ways to pass on generational wealth include preparing for unforeseen outcomes. This allows you to ensure that in the case of an accident or other tragic event resulting in incapacitation or death, your assets will be divided according to your wishes.
- Create an estate plan – Having an estate plan with specific investment strategies is valuable no matter what the size of the estate. Its how to make sure theres an easy transition of your assets to your loved ones after youre gone. Of course, the more you have, the more complicated your plan will be and may vary due to the type of assets and the beneficiaries, but it should clearly reflect your wishes.
- List beneficiaries by name – To make sure your wishes are followed, its essential to name the beneficiaries for each account to reduce conflicts and uncertainty during an already difficult time.
- Prepare a will – When preparing your will, you should include detailed instructions for distributing all your assets, where they are located, and how to access them. You will also want to plan guardianship for minor children and provide any vital information regarding financial issues. Its important to check your state of residences regulations to ensure the enforceability of your will and reduce any problems on carrying out your wishes after youve passed on.
- Prepare a trust – While a will takes effect after death, a trust is a legal entity used to hold and transfer assets to one or more beneficiaries during life or after death. It takes effect once assets are transferred to the trust. Benefits of a trust include eliminating or reducing estate and gift taxes.
- Discuss goals for passing on assets – When building generational wealth for your family, its important to include all family members in those discussions and get input from them so they know they are a valuable part of the family. After all, keeping them in the dark isnt beneficial for anyone. Without understanding your goals, they wouldnt be able to continue building wealth according to your wishes.
- Build financial education into a daily routine – Many kids are unaware of finances as they grow up and are expected to understand how it all works once they reach college age. Teaching lessons as kids grow up and starting them off with a savings account will ensure they understand finances. This will make them better at setting their own goals and set them up to continue generational wealth in your family.
Estate planning and open communication are vital for passing on wealth to the next generation. Although it can be time-consuming, its important to be as detailed as possible with your wishes, so theres no question as to what you want after your death.
Ways to build generational wealth
When you think about building family wealth, it seems pretty straightforward. You acquire wealth and pass it on to your children. But its not as easy as it sounds and can feel pretty overwhelming, especially when you have your own financial goals, like saving for retirement, while you begin saving for generational wealth.
The good news is that you can begin to build wealth to pass on to future generations. These ideas can get you started.
- Invest in a 401(k) or the stock market – When investing as a beginner, its important to keep a long-term view and understand its a beneficial way to begin building generational wealth. When you invest, you earn passively, protecting your money from inflation, and possibly benefiting from tax advantages. Keeping a long-term view is key in allowing your money to grow.
- Purchase life insurance – A life insurance policy provides for your family financially if anything unexpected happens to you and you can no longer care for them. When planning on how much life insurance you need, think about:
- How much is needed to pay off your mortgage
- Educational needs
- Income needed for bills and to maintain your lifestyle
- Total funds needed to pay off all debt
- Potential future debts
- Investing in real estate – Buying real estate can feel overwhelming, especially if you’re new to the idea. But it does offer ways to build wealth for the long term if done right. Homes have increased in value over time and can serve as a rental property. Depending on the homes location, you can provide long-term rentals, short-term vacation rentals, or even flip houses for a profit.
- Build multiple income streams – Creating wealth is about maximizing the time you have available to generate income. If you pay attention to whats happening in the world, youll notice the wealthy arent doing one job. Singers, movie stars, and business people all have side gigs or multiple businesses to add to their income, and you can do it too.
- Create passive income – Passive income is when you do the work once and benefit from that income forever. Some examples of passive income include writing a book and listing it on Amazon, developing apps, etc.
- Build a business – Running a business is another way to pass on generational wealth. Starting your kids working in the business early can give them a sense of ownership and the ability to learn how to run and grow the business. Then, when youre ready, it will be a smooth transition as you pass it down.
- Invest in education – College may offer opportunities for higher-paying jobs and the ability to grow in a career. Still, most people graduate with a pile of debt to show for it as well. Providing your kids with no debt upon graduation can lift the burden and offer them the freedom to begin building wealth.
The benefits of creating generational wealth
Money. The word itself brings up feelings that may surprise us, especially if we havent thought much about it. But, no matter how you feel, its a necessary part of life.
Generating wealth takes planning and time and can benefit the family for generations. One important thing to note is that generating wealth isnt about showing it off to impress others. Its about providing peace of mind and the type of security that only financial independence offers.
Some additional benefits include:
- The ability to live life on your own terms
- Provides educational opportunities
- Allows more time to be spent with family and friends
- Alleviates financial stress
- Allows time to work on passion projects
- Provides the ability to give back and volunteer your time
When building wealth, youll work hard and may not experience all the benefits, but passing it on will give your beneficiaries the opportunities to do so.
Although it may seem odd to think about how creating wealth could cause challenges, the reality is we all think about money and its meaning differently. One thing is for sure, when you dont have any, it feels much different than when you do.
So, when parents save for a lifetime to pass on wealth, they know how hard they had to work to build it, but will the next generation understand and appreciate it?
No one wants to make a mistake after putting so much time and effort into something, so getting honest about the situation is important. Some of the issues parents may face when planning to transfer their wealth are:
- Concern about whether the children will be able to manage the money.
- Relationships between the kids and how the money may affect them.
- Worrying that the wealth they worked so hard to earn will be squandered away.
- Concern over childrens feelings of entitlement.
- Concern about childrens lack of financial knowledge to manage the money.
- Worry over conflicting ideas about how the funds should be used.
- How to divide the wealth with blended families.
- Concern about the kids work ethic when they are expecting the money.
Parents want the best for their kids no matter their age, and for some, these concerns are genuine. Having a plan to address these issues can be done, but you can only do so much to safeguard generational wealth.
The bottom line
Building generational wealth doesnt mean you need to become a millionaire. It just starts with a financial plan and the determination to follow it.
As you can see, there are various options when it comes to building wealth to pass on to the next generation. However, one of the most important things to focus on is financial education, so your beneficiaries understand how to handle the money and use it to grow their own wealth.
When youre ready to start building your own generational wealth, download the Public app.