Money can’t buy happiness, but it can create opportunities, provide flexibility, and show care for the people you love. That’s why many families aim to pass wealth on to future generations.
If building generational wealth interests you, it helps to understand the most common sources and look for opportunities within your own family. Planning ahead also matters, as thoughtful management can increase the likelihood that your legacy lasts for decades to come. Here’s what to know as you get started.
What is Generational Wealth?
Generational wealth includes money and assets that pass down from one generation to the next, potentially providing for a long line of family members. Instead of having to start from scratch, individuals will have access to existing resources from parents, grandparents and other elders.
The level of wealth involved can fall anywhere on a broad spectrum. In some cases, assets can generate enough income to support large families without needing to sell any investments. In other cases, those with modest wealth can give the next generation a hand up with financial goals such as homeownership.
Why It Matters: The 3-Generation Rule
Research shows that 70% of families lose their wealth by the second generation, and 90% lose it by the third.1 This pattern often stems from overspending, lack of preparation, poor planning, or legal and tax missteps. This is why building wealth is one part of the equation - and helping protect it is another.
Why is Generational Wealth Important?
So, what is generational wealth for? A family legacy can benefit both the people who build it and those who receive it.
For those who pass assets on: It can bring a sense of fulfillment, knowing you're helping loved ones have an easier path forward.
For those who receive assets or resources: They gain added opportunities and flexibility, such as:
- Starting a business without taking aggressive risks.
- Paying for high-cost education programs (like medical school) without excessive debt.
- Pursuing passions or career paths that aren’t tied to financial pressure. For example, running a nonprofit or volunteering becomes more realistic when you’re not worried about monthly bills.
Ultimately, beneficiaries of generational wealth may enjoy a better life thanks to greater freedom and financial breathing room.
The 3 Pillars of Building Wealth
Families tend to build long-lasting wealth through three primary sources. Each contributes differently but can work together to support a multigenerational plan.
1. Business Ownership
Business ownership is a common approach. A well-run company may continue generating income long after the founder steps aside. Some families see quick success, but long-term growth is more typical. Year-to-year gains may seem modest, yet compounding over decades can make a large impact.
2. Real Estate
Real estate can offer long-term potential through appreciation and rental income. Property may also serve as a hedge against inflation and can be passed on to heirs, sometimes with meaningful tax advantages, including the step-up in basis (more on that later).
3. Portfolio Growth
Many families build wealth using mutual funds, retirement accounts, and other investments. Assets can grow over time with the right conditions, although values can fluctuate and returns are never guaranteed. Education can also serve as a foundation, as a degree often expands future financial opportunities.
Factors That Effect Wealth
Even well-built wealth can erode over time. These risks often go unnoticed but can significantly impact what reaches the next generation.
Taxes
Without careful planning, taxes can reduce what heirs receive. Capital gains, estate taxes, and income taxes can all come into play. One of the most important tax protections is the step-up in basis, which adjusts the value of inherited assets to their value at the original owner’s death. This may prevent heirs from owing capital gains taxes on previously accumulated appreciation.
Regular reviews with a financial professional or CPA can help families stay ahead of changing laws.
Probate
Probate can slow down the transfer of assets, add administrative costs, and make private family matters part of the public record. For large or complex estates, a lack of planning may increase delays and complicate the entire process even further.
Divorce, Lawsuits & Overspending
Several issues can strain or shrink wealth across generations:
- Some family members might spend too quickly
- Divorce can divide assets unexpectedly
- Lawsuits or creditor claims can threaten family property
- Health care costs may reduce long-term savings
While you can’t predict the future, planning helps reduce the impact of these events.
How to Pass It Down
Managing wealth wisely and preparing future generations helps the legacy last. This is where legal structures, financial tools, and clear communication become essential.
Trusts
Not all trusts function the same way. Here are two common types and what they can offer when you're thinking about long-term protection and flexibility:
| Revocable Living Trust | Irrevocable Trust |
|---|---|
| Avoids probate | Cannot be easily changed |
| Flexible and can be changed during the creator’s lifetime | May offer asset protection |
| Does not protect assets from creditors or lawsuits | Can provide tax advantages |
| Often used when long-term control or protection is a priority |
Wills
A will outlines who receives assets and under what conditions. It's a foundational document for most families and helps avoid confusion or disputes. However, a will alone still goes through probate, so many families pair it with other tools.
Life Insurance
Life insurance can play a significant role because:
- Death benefits are generally tax-free (with some exceptions)
- Funds usually transfer quickly
- Cash can prevent the sale of illiquid assets like real estate or business interests
It’s smart to review beneficiaries regularly. A financial professional can help identify when updates are needed.
Beneficiary Designations
Retirement accounts, life insurance policies, and some financial accounts allow you to name beneficiaries. Doing this correctly may help your family:
- Access funds faster
- Reduce probate exposure
- Expand their tax-planning options
529 Plans
If part of your legacy involves helping future generations with education, 529 plans allow your contributions to grow tax-free when used for qualified education expenses. They can also play a role in long-term planning across generations.
Custodial Roth IRAs
A custodial Roth IRA lets a parent or guardian open a Roth IRA for a child who has earned income. It can help lay the groundwork for long-term financial growth because:
- Investment gains can grow tax-free over time
- Contributions can be withdrawn at any age without taxes or penalties
- Decades of compounding may help build a strong financial base for adulthood
While contributions are always accessible, withdrawing earnings is different. If earnings are taken out before the account has been open for five years and before the child reaches age 59½, taxes and a penalty may apply.2 This helps create a clearer understanding of how the account works and what to expect if money is accessed early.
Educating the Next Generation
Even the most carefully designed plan can fall apart without preparation. Many people never learn advanced financial skills, and managing wealth intended to last for generations goes far beyond basic financial literacy.
To help your family feel confident and prepared for the responsibilities that come with inheriting wealth, it can help to give them guidance and structure ahead of time. Some practical ways to start include:
- Explaining your goals and intentions
- Teaching basic financial skills
- Introducing trusted professionals (financial planners, insurance agents, CPAs, attorneys)
Preparing heirs increases the chances your plan stays intact and helps them understand not just the assets they’ll receive, but the purpose and intention behind your legacy.
Managing Risk & Anticipating Challenges
Because long-term wealth must withstand changing markets, laws, and family dynamics, a thoughtful approach to managing risk becomes essential.
Risk management could include:
- Diversification
- Insurance products that protect principal
- Legal structures that shield assets
- Reviewing exposure to taxes
- Considering whether future generations can manage certain assets (like real estate or a family business)
With consistent guidance from trusted professionals, you can help keep your strategy resilient and ready for whatever the future brings.
Bottom Line
Intergenerational wealth can improve life for your children and future generations, giving them opportunities and breathing room.
With intentional planning - supported by the right legal documents, tax strategies, financial tools, and family education - you can help create a legacy that endures. A financial professional can provide guidance and coordinate with your tax and legal advisors so your plan remains strong across generations.
Planning your estate today can help set your family up for generations of financial success. Start Your Free Plan
Sources
- Why 90% of Families Lose Their Fortune and How to Beat the Odds. https://jakeclaver.substack.com/p/why-90-of-families-lose-their-fortune.
- Topic no. 557, Additional tax on early distributions from traditional and Roth IRAs. https://www.irs.gov/taxtopics/tc557.
