How To Build Generational Wealth

Building generational wealth when you don’t come from generational wealth requires intentional strategy and commitment. However, there are few things that you can do for your family that are more valuable and meaningful than striving to ensure the future financial success of your heirs for generations to come.

What Is Generational Wealth?

Generational wealth refers to transferring money, property, and other assets from one generation to another. It encompasses all types of financial transfers across generations – real estate, gifts, inheritance, and more.

Why is Generational Wealth Important?

Imagine being able to ensure a high quality of life for your children and grandchildren.

The wealth you transfer to your heirs can make a tremendous difference in their ability to live comfortably and pass along their own generational wealth. The intent is to lift up your family for generations to come. An estate plan focused on long-term financial confidence for the next generation allows you to leave a legacy of financial independence.

Knowing this, it becomes vital to understand how to build generational wealth and what you can do for your family to help them live financially confident lives.

Ways to Build Generational Wealth

Once we understand the concept, the next step is to discover how to create multi-generational wealth. Here are ways to help support your family for generations to come through intentional estate planning with a focus on family wealth.

Talk About Generational Wealth With Your Family

One of the most important ways you can build generational wealth is to include your family in your estate planning and plan on building family wealth together. In addition, by helping your children and grandchildren learn about money and how it works, the next generation may be better equipped to receive the wealth they are presented with and build generational wealth themselves.

Invest in the stock market 

Make your money work for you through investments instead of just allowing funds to sit in a bank account. For example, consider the stock market or other investment strategies that can help to build generational wealth.

If you wish to help your children benefit from the power of compound interest, there are several ways that you can help your child invest in the stock market, too.

Establish a custodial account

A custodial account can be created with the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) and will allow you to invest funds for your minor children.

The funds within a custodial account can be used for any purpose, as opposed to a 529, which is specifically intended for certain educational expenses, or a Roth IRA that cannot be accessed without penalty until later in life.

Custodial accounts can be opened through your financial advisor or local banks just like a savings account and are common assets held by those focused on building family wealth.

Hire Your Child and Open a Roth IRA for Them

If you own a business or choose to establish one, you’ll want to consider employing your child and opening a Roth IRA for them.

Parents can hire their children to work for their family businesses at any age to offer age-appropriate services. Even the youngest of children can serve as models for marketing purposes or actors for social channels if that can be an integral component of your online marketing strategy. As the children get older, they’ll be able to take on more complex responsibilities and earn a higher wage as a result.

Once your child has earned income, they are eligible to open a Roth IRA. Since their income is not likely to be significant, their tax burden will be quite low. Investing a few thousand dollars a year when they are young may catapult their compound investment gains and allow for a tremendous advantage toward their future retirement.

The life lessons children can learn about personal finance (and more!) while working in a family business are invaluable to their future.

Invest in things that are dependable

Aim to ensure the assets you hold will be worth what you paid for them and continue appreciating over time. Depreciating assets like cars and boats may be appealing at that moment, but if the aim is long-term wealth, you’ll want to focus on assets that hold their value and appreciate over time.

Set Up a Trust Fund

This foundational component of a generational wealth-building strategy is typically how wealth is passed from one generation to the next.

The trust is managed through a neutral third-party who will hold assets and manage wealth until the recipient is of legal age to receive them or the age you’ve specified when establishing the trust.

This is often established when you create your estate plan, but if you haven’t done that yet, you can always make revisions as your financial needs change.

Invest in real estate

Real estate could feasibly be a spectacular tool for generational wealth-building. While there are certainly variations in market value and trends, real estate is historically among the best performing asset classes. Moreover, it offers a way to build wealth through appreciation and an income stream through rental property.

As an example, consider purchasing a duplex when your child is young. If paying cash for the property fits your overall investment strategy, wonderful. If not, consider a 15-year note. A smart purchase will allow you to repay the loan by renting the property over the next 15 years. When the loan is repaid, your child will be at or near 18 years of age. By gifting the property to them, you will be providing both their first home and their first major investment.

Build a business to pass down

Possibly the most robust wealth-building strategy available involves establishing a business. This is not solely because businesses often make money but because of the many tax advantages and lifestyle benefits they can provide.

For example, your business could be the perfect vehicle to purchase and develop the aforementioned real estate and pass it down to create generational wealth-building opportunities.

When you own a business, even as a sole proprietor or single-member LLC, you have domain over so many important financial matters. As mentioned above, you gain the opportunity to hire your family members, reduce your taxable income through appropriate write-offs, and teach your family sounds business and money management along the way.

Take advantage of life insurance 

Life insurance can be used as part of generational wealth-building by designating beneficiaries to receive financial benefits upon your passing.

Use life insurance in your estate plan to build generational wealth by being intentional with the way you structure your policies. Designate the correct beneficiaries with well-written intentions so that if you were to pass away, those who will benefit from the generational wealth plan would have a way to access it at a time you feel appropriate to your wishes.

While term insurance will often be the preferred strategy for individual financial planning, whole and universal policies may be more successful in creating generational wealth. The main purpose of a permanent life insurance (whole, universal, indexed, or variable universal life) policy is to provide a death benefit. It is not a short-term savings vehicle nor is it ideal for short-term insurance needs. It is designed to be long term in nature and should be purchased only if you have the financial ability to keep it in force for a substantial period of time.

Invest in your children’s college education

The cost of a college education has skyrocketed over the past 20 years. The average cost of attendance at a 4-year in-state education now exceeds $100,000. There has never been a better time to plan ahead and invest in your children’s education.

Making use of a 529 plan is a generational wealth-building strategy many parents consider. These plans allow your child or grandchild to receive the money tax-free if used for education expenses.

Since you can use money from 529 plans to pay for college tuition at any school in the country, consider using these accounts as a way to leverage generational wealth.

Create multiple streams of income

By establishing multiple income streams, you can create financial freedom for yourself and separate streams of generational wealth that will support future generations.

Internet folklore claims that the average millionaire has seven sources of income. While there are no valid studies to support this notion, the concept itself is surely viable.

More streams of income will often translate to more income and eventual wealth. Especially when some sources are passive, such as dividends or royalties, or semi-passive such as rental properties, they are more easily passed down to heirs.

Save money and be smart about it!

Most other strategies to build generational wealth are focused on increasing income or building assets like real estate. Other avenues may be obvious but are worth consideration.

Saving money is a simple idea that is often hard to put into practice. Yet, saving money is generational wealth-building at its most basic level.

Savings translates to financial confidence. A solid financial foundation allows you to pursue unique strategies that come with inherent risks, like pursuing investments or putting money in the name of someone else.

Pay attention to taxes

Possibly the most impactful method of saving money is to reduce your tax burden. Of course, a tax strategy is a topic of its own right. Still, by maximizing your tax deductions and lowering your tax obligation, you can save a lot of money that will be useful in building generational wealth.

It is also crucial to be mindful of taxation of the transfer of wealth. Speaking with a knowledgeable financial and tax advisor about matters like your investments, life insurance, and real estate to ensure unexpected taxes don’t thwart your efforts.

Teach your kids about personal finance

You don’t have to be a brilliant financier to teach your children personal finance. Start simple by teaching them about money management and saving. Here are some simple concepts that every child should be equipped with:

• How to set and achieve financial goals
• How to create and use a savings account
• The power of compounding interest when used wisely
• The importance of managing debt

Above all, include your children in regular conversations about money. It is a compelling subject, and kids are naturally curious. Indulge their curiosity by pulling the curtain back and helping them understand how money works and manage it properly.

The best part? 

You’ll probably learn a few things along the way, too.

How to start generational wealth

There are many ways to start building generational wealth, but it’s essential to think about what you want your money to do for you and your family before implementing any of these strategies. Consider all of the possibilities before deciding on one strategy – this allows you to determine what approach will best suit your family based on your unique circumstances.