How often have you looked back and realized how much easier life would be if you had inherited money, a.k.a. generational wealth? What if you started life with enough money to pay your way through medical school or earn that prestigious MBA without carrying any of the crushing student debt? Or, perhaps you are someone who is in a position to fulfill your life dreams because of adequate family financial support.
Regardless of your current financial wellness situation, it is likely that you already have an implicit understanding of the importance of familial wealth. Generational wealth building is an approach to financial management that secures personal, long-term prosperity, but that of your successive generations as well.
As wealth has become increasingly concentrated over the past decade, the challenges to generational wealth-building have grown exponentially complex, especially for black families. Most wage earners in the US, across the spectrum, focus on managing their own finances while making enough to provide for the basic needs of their children.
Finding the right strategy early in life is the key component to finding the correct path to generational wealth. If you are starting a family, or growing an existing one, now is a fantastic time to learn about the several proven approaches to building long-standing familial wealth.
What Is Generational Wealth?
Generational wealth suggests intergenerational transfers of capital that begin with one wealth-originating family. Those resources then pass from one generation to another. To fully grasp the concept of generational wealth, comprehending what “wealth” means is imperative. Wealth indicates an abundance of capital, material prosperity, and access to plentiful resources.
With that in mind, the many thriving professionals who, by all outward appearances, seem to be living the American Dream are plentiful. But, assuming they financed their way through graduate school and their real estate assets mortgaged with bank debt, it is safe to say their success is not attributable to family money.
And because so many accomplished professionals are paying off their college education and other costly debt, they simply cannot save. Subsequently, middle-class workers find attaining the high levels of wealth that benefit future generations to be out of reach, even as those workers represent the top ten percent of all earners.
The typical family benefiting from generational wealth is doing so because it follows an established set of wealth-building and management principles. In addition to this, they care enough to preserve their considerable earnings while they accumulate savings specifically to benefit subsequent generations.
Families that originate abundant wealth always come from humble beginnings. They commit a series of sacrifices to build up considerable savings to ensure their children do not repeat the cycle of poverty.
Generational wealth starts taking shape after one family utilizes a cash inheritance or life insurance policy to invest in income-producing assets such as a family business or rental property.
The success of long-standing family wealth depends upon a set of shared values. These values span across generations and remain tied to principles aimed at enhancing the prosperity of their children.
This type of planning always entails a degree of personal financial sacrifice over always having the finest things money can buy. Similarly, protecting assets through secure trust instruments to ensure large sums of capital will not be spent frivolously or on a whim is no less important than sustaining multi-generational wealth.
Why Is Generational Wealth Important?
While increasingly fleeting, the American Dream is generally achievable for those who pursue the proper educational channels and work hard.
However, those who benefit from familial wealth are at a considerable advantage over the average well-educated professional carrying debt. The rising cost of tuition and record inflation make saving money difficult, even for medium to high wage earners.
Absent the resources provided by familial wealth, even the most career-minded people continue to find themselves burdened with an endless stream of debt, taking years to pay off. Moreover, as time progress, acquiring new capital is more challenging.
Because paying off student loans and high-interest consumer debt takes so long, creating substantial wealth later in life might be entirely improbable.
Conversely, those with access to an abundance of familial financial resources don’t carry consumer debt. Instead, these people use excess funds to invest in the stock market or build a new family business.
Of course, if you’re single, personal financial wellness is always a priority. But if you plan on having a family, those priorities change. If you want to provide financial security and a comfortable lifestyle to your children, wealth-building strategies are the key, even if they are long-term in nature.
Challenges Of Building Generational Wealth
While building generational wealth is a goal that many income earners aspire to, it requires earmarked discipline. Even with that, success is not easy to achieve. Generating significant capital that leads to lasting wealth is not as simple as working hard and passing down a set of assets accumulated over a lifetime.
Statistics show that more than two-thirds of generational wealth never make it past the second generation. And by the third generation, 90 percent of familial wealth is completely dried up. So the primary challenge to originating lasting assets is understanding how to get started early in life and how to protect your money thereafter.
Most earners lack both the informational and material resources to start building wealth that survives more than a generation. This is primarily because such levels of wealth are uncommon, and when they do exist, they rarely last.
Eight Ways To Build Generational Wealth
It’s hard to imagine a parent that doesn’t want to help their children avoid the same financial struggles they had growing up. But finding the right strategy to achieve this is never easy. Establishing wealth that lasts requires more than significant capital.
Here are the 8 best and most proven approaches to building generational wealth:
1. Invest In Your Child’s Education
Investing in your family’s education, particularly early education, is crucial to sustaining wealth. Raising financially educated, independent adults is the only path to securing a legacy that lasts more than a generation.
If you don’t educate your family about personal finance through open conversations about wealth and money, there should be no expectation that the wealth you pass on to your kids will ever last.
Allow your kids to talk about family money in the home and ask questions. You can start as early as age seven with basic concepts such as needs vs. wants and the value of saving and creating value within the community.
With time, you can start introducing more advanced personal finance concepts by helping them discover new tools. Historically, the education system performs poorly at educating students on practical financial literacy and finance topics if they don’t avoid them altogether. This means the task of equipping financially responsible adults falls upon you, the parent.
But you might still be in the process of figuring your own finances out. So remain open with your children about both your financial wins and losses. You want them to benefit from learning both your financial success and failures.
2. Invest Your Money
Market investing is a time-proven approach to growing your wealth without putting in the extra work associated with managing income-producing real estate or a small family business. And while accumulating money in a bank is better than not saving at all, unfortunately, it won’t do much for generating significant wealth.
Inflation is now a serious problem, and the value of the dollar has decreased nearly 7% year-over-year. Even without a high inflationary environment, dollar deflation is entirely assured, especially after a considerable duration. Bank savings that might have been substantial during your lifetime will be significantly less once you pass it on to your children.
Investing your hard-earned savings entails risk. But it is also the approach to guaranteeing your family receives a maximal inheritance.
However, we’ll get into the minutia of a few of these later. The following list represents the top investment options available:
- Real Estate
- Mutual Funds
- Certificates of Deposits (CDs)
3. Invest In The Stock Market
As mentioned above, there several dependable investment opportunities to choose from. However, investing in the stock market over the long term is the most proven approach to building a large source of wealth that doesn’t require the amount of work necessitated by managing real property or a small business.
The key to succeeding in the stock market is working with a financial advisor to develop a diversified portfolio and long-term plan that consistently earns you money over time.
The S&P 500 tracks the stock of the 500 largest companies in the US. Stock investments in organizations have produced more than a 10% average return since the S&P 500 started recording these data in 1926.
As a result, stocks are a fantastic way to protect against inflation and provide long-term wealth-building opportunities with little effort at relatively low fees.
4. Invest In Real Estate
Investing in real estate can be profoundly beneficial to establishing long-term wealth. However, this strategy is not without its challenges. While most investment property assets appreciate over time, positive cash flow from rental income provides the most opportunity for investors.
Real estate investing can be off-putting to some because of the hands-on requirements. However, you can always start small by moving out of your primary residence so you can rent it out and purchase another property. This is how most small investors begin building a more extensive portfolio.
Investing in commercial real estate can be competitive. The profitability of buildings over five units is subject to their capital appreciation rates. Commercial buildings in desirable areas with high cap rates rarely come on to the market and are hard to encounter.
Before investing in any commercial dwelling, you should conduct a property market analysis with a credible finance professional experienced in this kind of real estate.
5. Create A Business To Pass Down
Not everyone has the financial knowledge or an entrepreneurial disposition. But if you have any inkling to strike out on your own at all, you should, at a minimum, consider starting a side business. The majority of the world’s wealth is attributable to small family-owned businesses, and they contribute to almost 60 percent of the US gross domestic product (GDP).
Startups aren’t without risk, however. Over 80 percent of them fail. So creating a new business, especially one that requires a hefty upfront investment, is something to weigh carefully. Nevertheless, if your business takes off, it becomes a financial legacy that can span for generations.
Alternately, a business is an income-producing asset that’s salable -the proceeds can be reinvested in a more profitable enterprise.
6. Take Advantage Of Life Insurance
Life insurance is another proven method of passing down considerable wealth. The right life insurance policy, not unlike stock market investments, entails little work and should be incorporated into every estate plan.
Assuming your children are dependent upon your income, the financial circumstances can be dramatic in the event of your premature passing. Term life insurance is among the more affordable options to help assure your dependents remain financially secure after you’re no longer able to support them.
The loss of a close family member is difficult enough. The financial strains associated with an unexpected passing only compound the stress and grief. Presuming your objective is to keep your family financially secure well into the future, securing an adequate insurance policy is one of the best ways to go about it.
7. Custodial Accounts
Custodial accounts reflect any type of investment account held specifically in a child’s name but managed by another adult, acting as a fiduciary. These types of investments are great wealth-preserving tools. In addition, they go a long way in assuring that your nest egg is maximized for subsequent generations.
They’re not dissimilar to trusts since custodial accounts represent one of the most common generational-transfer financial vehicles. Both tools allow parents, grandparents, and guardians to maintain complete control of the invested funds. The upside to a custodial account is that they are often much cheaper to create than a trust.
The main caveat to custodial accounts is that, unlike a trust, your child must necessarily take over the financial account upon becoming a legal adult. If you’re dealing with a considerable amount of money, it may not be in your child’s best interest to inherit this kind of windfall at such a young age.
You can open a custodial account at most banks, credit unions, brokerages, and financial service providers. You can open these accounts online or in person at a traditional brick-and-mortar institution. The banks establish the terms, initial investment requirements, minimum balances, rates, and service fees.
8. Set Up A Trust
As stigmatized as they are in popular culture, trust funds remain one of the most powerful financial planning resources available. Setting up a trust fund is the most practical approach to protecting generational wealth because it allows for the most control over how it is passed on.
Any assets held within a trust avoid probate and some estate taxes. Estate planning with trusts protects your wealth against legal fees and costly transfer taxes liabilities that impact the balance of your inheritance considerably. Do note that custodial accounts differ from guardian accounts which often include adults who are unable to manage their own finances on account of physical or mental disabilities.
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Generational Wealth Transfers After Death
Ideally, you want to start with a wealth transfer conversation early with your kids so that they understand what they’re likely to inherit. Then, you should consult with an expert financial advisor to ensure your wealth passes on to your heirs in a tax-efficient manner.
Establishing a quality trust is the most effective means of guaranteeing that your wealth remains in your direct bloodline and doesn’t transfer outside of the family. The situation can be heartbreaking for your intended heirs when your wealth transfers outside the family. You have spent a lifetime leveraging your talents to generate influential wealth.
You want to ensure it goes to the people you love most.
That’s why it’s crucial to maintain a sound plan concerning how and where you want your wealth transferred after death. Ensure all parties are clear and comprehend the intentions established in the inheritance process.
Again, the best approach is early discussions about family money and what your beneficiaries should expect. This way, your children can start establishing their own long-term financial goals.
Tax Consequences And Strategies For Transferring Wealth
Tax-efficient intergenerational wealth transfer requires proactive planning. It’s not unlike your wealth-building strategy on the whole -the sooner you get started, the more likely you are to succeed. But, again, the key to achieving your goals here is keeping open discussions with your heirs.
You know you can’t take your wealth with you, so you want to ensure as much of it as possible goes where you intend it to after you’re gone. Technically, there are only three places where your wealth could land after you pass: your loved ones, charity (non-family members), and, of course, taxes.
If you believe you are subject to a high estate tax, it’s essential to engage in proactive planning to ensure as much heritable wealth as possible is transferred to your children. Several strategies exist that can reduce high estate taxation.
For example, you can take advantage of annual gift tax exclusions, start making direct payments for qualified medical care and education expenses, or convert traditional IRA assets to Roth IRAs.
Similarly, irrevocable grant trusts and custodial accounts also help reduce high estate taxation rates. Needless to say, these steps account for only part of the battle.
To avoid losing generational wealth, as 70 percent of the population will, you should always maintain open and honest talks about the wealth transfer process with your family. Start establishing long-term financial goals as a unit early on, and be sure that every family member is clear on their roles.
Generational Wealth And The Wealth Gap
According to NPR, “Non-college-educated and Black Millennials are still lagging way behind their white counterparts. About 80% of Black millennials with at least a bachelor’s degree still have student loan debt, compared with about half of white millennials.”
Much has been said about the millennial generation over the last decade. However, by 2016 the average millennial household claimed only $28,000 in net worth, placing them 40% of median wealth figures for previous generations.
With that in mind, while most financial analysts anticipate a significant transfer of wealth, it may not be enough to prevent millennials on the whole from being substantially poorer than their Baby Boomer and Gen X predecessors.
A lack of a college degree, a long-standing racial wealth gap, and other economic factors put Black millennials in an even tougher position. Lower earnings, furthermore, correlate with a high credit card debt and a low credit score.
In the absence of financial security, they’re less likely to have an emergency fund. All of this tends to snowball into more enhanced gaps in wealth.
Generational Wealth Transfers During Life
Remember that not all generational wealth transfers happen after death. Indeed, there can be immense tax savings in wealth transfers that occur during your lifetime. Wealth transfers that occur while you and your children are still alive are called “inter vivos.” These types of gifts are less common but still account for a noteworthy fraction of them.
Funding college or providing direct payments toward a high-quality education for your heirs is among the most popular types of inter vivos gifts. It ensures your heirs will graduate from college without student loans and can begin enhancing their wealth early in life without being burdened by student debt.
Generational Wealth And Racial Inequality
The persistent white and black wealth gap has always been real, but the impact of COVID-19 pandemic restrictions was devastating to black workers and black business owners across the country.
Preexisting wealth disparities between white families and households run by black Americans have been on the radar for some time. But the black community proved to be considerably more vulnerable after the economic recession triggered by COVID-19.
Generational wealth undoubtedly played a role in determining how well a family absorbed the economic shock brought about by the recession. With wealth defined as the difference between household assets and debt, even highly educated and top-earning black professionals were at substantial risk.
This emphasizes how generational wealth is because it often accounts for the critical safety net that allows a family to weather severe economic downturns that have been occurring more frequently.
As you might’ve learned, generational wealth implies quite a bit more than having enough to cover a financial emergency or sound retirement planning. When it comes to building a lasting family estate, proper planning and education remain the two key factors that determine how long your wealth will last after you’re gone.
The impact of generational wealth transfer can be significant. Be sure to seek qualified advice from an advisor experienced in estate planning.