What Is Generational Wealth, and How Can I Build It?
Parents typically value setting their children up for success and providing their descendants with the means to enjoy better lives. Parents may want their family’s legacy to be one of comfort, abundance, and generosity. One way to achieve those goals is by passing on generational wealth to your children. If you teach your children how to manage that wealth wisely, it can benefit their children and grandchildren as well, establishing a lasting tradition of familial financial support.
What Is Generational Wealth?
Generational wealth is any money or assets passed down from one generation of a family to the next, such as cash, investments, real estate, heirlooms, or a family business. Generational wealth can be transferred as a one-time gift, such as an inheritance upon the death of a parent or grandparent. However, generational wealth often manifests throughout a person’s life through family spending and gifting patterns. Moreover, the children of high-net-worth and high-income individuals often enjoy opportunities to save and invest that are not easily accessible to others (e.g., earning income from working at a family business to contribute to a custodial IRA or building a credit history by being an authorized user on a responsible parent’s credit card). Substantial generational wealth can accumulate and move across several generations as some assets increase in value over time to provide centuries of prosperity—if managed well.
What Strategies Can I Use to Build Generational Wealth?
Building lasting generational wealth requires more than just increasing your personal net worth in hopes of leaving your children the money you do not spend in retirement. Effectively accumulating and transferring generational wealth involves long-term strategic planning.
Invest for the Long Term
It is unrealistic to expect that you can build generational wealth by putting cash in a traditional savings account. Investing is a crucial component of growing your net worth over the long term so you will have lasting wealth to pass along to your children for generations to come. Investing in a diverse mix of stocks and bonds, such as by investing in mutual funds or index funds, is a popular long-term strategy for building wealth. When investing for the long term, it is beneficial to prioritize tax-advantaged investing accounts such as a 401(k) and an IRA. Investing up to the maximum yearly limit in such accounts will lower your overall tax burden, allowing you to save more money to pass along to your descendants. If you have money left to invest after meeting the maximum limits on available tax-advantaged accounts, you may consider investing the rest in a brokerage account.
Teach Your Children How to Manage Wealth
To set your children up for financial and personal success, help them acquire the financial knowledge and skills that helped you accumulate and manage wealth. It is imperative to teach your children, grandchildren, and other beneficiaries how to manage the wealth you are leaving them so they can continue the family’s legacy of providing for the next generation. This knowledge transfer could include discussing basic personal finance principles (e.g., budgeting, investing, assessing risks and rewards), modeling good financial behavior, and giving children practical and age-appropriate opportunities to practice managing money. Having open and honest conversations about your beliefs about money and financial values helps children set their own financial goals and create a spending plan for their allowance or earned income.
Create a Tax-Efficient Estate Plan
Estate planning is the process of planning for distributing your estate (i.e., money, property, and all other assets) after you die. As of 2023 [mk1] the federal government taxes the transfer of estates that exceed $12.92 million, and that threshold is expected to drop to $7 million in 2025. Therefore, many estate planning strategies for wealthy individuals focus on ensuring that beneficiaries receive as much of the estate as possible by minimizing estate taxes. Some strategies for reducing estate taxes include transferring assets into a trust, reducing the value of your estate by gifting money and assets to your intended beneficiaries throughout your life, and establishing a limited partnership for a family-owned business you want your children to inherit. The specifics of your estate plan may vary depending on your personal circumstances and priorities, so it can be a good idea to seek professional guidance from a financial advisor and an estate planning attorney.
Work With a Financial Advisor
A trustworthy and experienced financial advisor can help you avoid costly mistakes and guide you toward opportunities that align with your goals, setting yourself and your descendants up for the best chance of financial success. If you have questions about how you can provide for your descendants by building generational wealth, the financial advisors at Business & Financial Strategies would love to meet with you for an initial 20- to 30-minute in-person or virtual conversation. They can help you make informed and strategic financial decisions to maximize your net worth and make progress toward your financial goals. Additionally, they can offer a financial professional’s perspective on estate planning and advise you in crafting an estate plan that will enable a smooth and efficient transfer of wealth to your loved ones. Business & Financial Strategies offers comprehensive and fully integrated financial services, including financial planning, investment planning, estate planning, and family wealth counseling. Business & Financial Strategies has offices in the Iowa City/Coralville area and in Fairfield, Iowa, but it serves clients throughout the United States. To learn more, please call 319-358-7700 or visit www.BFSFinanicalPlanning.com to schedule a complimentary initial consultation.