Your Guide to Creating Generational Wealth

Creating Generational Wealth DefinitionCreating Generational Wealth Definition

Key Takeaways

  • Generational wealth refers to assets that are passed down from one generation to the next, providing financial support and opportunities for future generations. This can include money, property, businesses, investments, etc.
  • Building generational wealth takes time and often starts small through things like business ownership, investing, real estate, or higher education. Compounding growth over decades can build substantial assets to pass on.
  • To extend wealth over generations, it's important to have a transition plan through tools like beneficiary designations, educate heirs on managing assets, manage risk carefully, and anticipate challenges like lawsuits, health crises, or overspending that could threaten the legacy.
  • Tax planning is crucial for preserving intergenerational wealth, so working with CPAs and tax attorneys to develop tax-efficient strategies can help assets last longer.
  • Involving financial planners, accountants, attorneys, and other professionals can provide expertise to help a family successfully preserve and manage a legacy over decades and generations. Careful coordination is key.

Money can't buy happiness. But it can provide opportunities and flexibility for loved ones as well as show them you care. Those are just a few reasons why it's a common goal to pass on wealth to future generations.

If the idea of creating generational wealth appeals to you, it's essential to understand where wealth typically comes from. That way you can explore opportunities in your own family. What's more, it's wise to plan ahead so you can manage assets effectively. By doing so, you improve the chances of your legacy lasting for multiple generations. Here's a start on what you need to know.

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.

Benefits of Creating Generational Wealth

So, what is generational wealth for, exactly? A family legacy can benefit both those who create wealth and those who receive it. For those who are fortunate enough to pass assets on to others, it may feel satisfying to know that you're making life easier for loved ones.

Those who receive assets or resources benefit from having more opportunities and greater flexibility. For example, they might be able to start a business or fund expensive education programs (such as medical school) without taking aggressive risks or excessive debt. They might also enjoy the freedom to pursue passions or employment without financial concerns. For instance, running a nonprofit or volunteering is substantially easier when you don't have to worry about paying the bills.

Ultimately, beneficiaries of generational wealth can enjoy a better life.

How Families Build Wealth

There are countless ways to accumulate enough assets to serve multiple generations. Families often build wealth through business ownership, but that's just one example. When you own a business, it can continue operating and providing income over multiple lifespans — even for long after the founder is actively involved.

Investing is another avenue to generational wealth. For some, that happens with real estate, which could possibly offer appreciation and income payments over the long term. Other investments might include widely held vehicles such as mutual funds or more esoteric holdings. With good fortune, enough time or extraordinary skill, assets can potentially grow to become valuable. Of course, investments cannot guarantee growth or sustainment of principal value; they may lose value over time. Past performance is not an indication of future results.

While it's not impossible to be an overnight success, it's probably best to expect that building wealth takes time. For instance, a business owner or investor might start small and experience incremental growth over many years. While the gains might be barely noticeable from year to year, long-term compounding can be surprisingly powerful if all goes well. Of course, things might not always go well, and temporary setbacks or catastrophic losses are always a possibility.

In some families, wealth begins with education. That might apply to those who are starting with little or nothing and building from the ground up. When the first person in a family gets a college education, for example, the family's financial future can change drastically.

How to Extend Wealth Over Multiple Generations

With thoughtful management and ongoing monitoring, you can improve the chances of wealth lasting for multiple generations. Managing a significant legacy requires careful planning. It's often best to involve professionals who can provide expertise on technical aspects and additional perspectives. Here are several strategies for extending wealth:

Passing Assets to the Next Generation

As assets move from one generation to the next, it's crucial to help ensure that the transition goes smoothly. Because doing so may be quite complicated, it's helpful to know a few tips to facilitate these events.

Beneficiary designations are often a useful tool when passing funds after death. With the properly designated beneficiaries, those individuals may have additional options for managing taxes, which can help the process can go more quickly and smoothly. What's more, it may be possible to reduce exposure to probate (including the public records and costs associated with probate) when using beneficiaries.

Life insurance can also be an effective tool for transferring assets to loved ones. That's because the death benefit from a life insurance policy is generally tax-free to beneficiaries (although some exceptions exist). As a result, the next generation can get a substantial boost in assets after a family member's death. Plus, that cash provides flexibility, which may help prevent beneficiaries from needing to sell nonliquid assets such as real estate or business interests.

It's wise to review beneficiary designations and life insurance policies regularly. To help make sure that things are set to go smoothly, work with a financial professional to anticipate when any changes might be needed.

Educating Family Members

Receiving a substantial amount of money or other assets can be overwhelming. Schools typically don't teach financial management skills, and managing enough wealth to support multiple generations — or just the next generation — is beyond most financial literacy programs. As a result, it's critical to help prepare your family for what's coming.

When and how you share information is a personal choice. You might not want family members to count their chickens before they hatch or take an entitled attitude. You might not want anyone to know how much you have. But you probably also want to avoid the tragic situation of some lottery winners. They are the ones who end up bankrupt in a relatively short amount of time after winning more money than they should ever need.

Help family members appreciate the importance of any legacy assets they will receive, and discuss your goals for those assets. It's also important to teach them the skills needed to manage wealth or introduce them to trusted financial professionals who can act as stewards. A good insurance agent and financial planner are essential in many cases. Also expect that your family will need to enlist the help of a skilled CPA and various attorneys from time to time.

Managing Risk

Risk management is critical for everyone. It can take on a unique flavor when you're planning for a legacy. Unlike a couple or an individual planning for retirement, you might have a much longer time horizon — possibly the lifespan of multiple generations. What's more, you don't necessarily need to pursue large gains, depending on the situation, although you and your family might have an objective to grow your assets.

Ultimately, your investment choices require an extreme amount of care. Because you have a lot to lose, it's worth leveraging resources from professional advisors as you manage these funds. Plus, you and your loved ones might want to take advantage of the freedom available from having significant assets — such as travel, volunteering or other pursuits — instead of spending your time managing assets.

Consider typical risk management strategies such as diversification and insurance products that guarantee principal as you explore your options. Just remember that diversification cannot guarantee profit or protection against loss in a declining market. It's also wise to consult with attorneys who can evaluate your family's risk as well as potential solutions.

Anticipating Challenges

It's impossible to predict the future, but it's reasonable to assume that your family will face some challenges over the years. Keep that in mind as you choose investment solutions and legal structures for your assets. Your plan may need to adjust, so it's wise to develop long-term relationships with financial, tax and legal professionals.

For example, some people might want to spend excessive amounts, threatening the ability of funds to last for multiple generations. Likewise, divorces and lawsuits can be problematic. Even health care costs can drain assets quickly. When creditors want to claim assets from a family member, it might be helpful to explore trusts and other mechanisms that might help conserve legacy assets. Those tools could someday help shelter assets or protect beneficiaries from themselves.

You might also face logistical challenges. If your wealth consists of real estate or a family business, are future generations willing and able to manage them? If not, consider alternatives, such as converting the assets to more liquid vehicles or hiring management teams to handle operations.

Finally, taxes can eat away at wealth, so a tax-aware strategy is crucial. Work with CPAs and other professionals to review your exposure to taxes and evaluate opportunities and pitfalls. Remember that tax laws are complicated and change over time, so periodic reviews are essential.

Bottom Line

Intergenerational wealth can make life better for your children and subsequent generations. As a result, loved ones have the freedom and flexibility to pursue what they value most. Plus, they may be able to avoid many of the financial challenges that are an unfortunate reality for others.

That said, it's critical to manage assets wisely and ensure that future generations are well equipped to continue your legacy. But you don't have to do it alone. A financial professional who has experience with these matters can share valuable ideas and help coordinate with other tax and legal advisors you may be working with.

With a well-thought-out strategy in place, you improve the chances of providing a better life for generations to come.

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