Generational Wealth 101: What Is It and How Do You Build It?

For a prime example of generational wealth, look no further than the newly anointed King of the UK, Charles III. According to Forbes, upon the recent death of his mother, Queen Elizabeth II, he inherited a $500 million estate and assumed ownership of institutions that manage $42 billion in assets. Oh, and courtesy of a UK law passed in 1993, none of it is subject to inheritance tax.

Thankfully, monarchs aren’t the only people to build or benefit from generational wealth. Every day across the planet, financial assets of varying values pass from one cohort to the next. Alas, it’s also common for people to squander fortunes they could have left behind. To help you avoid that fate, here’s everything you need to know about generational wealth – including how to build and protect it for your family.

What Is Generational Wealth?

Generational wealth is any asset passed down from one family generation to the next. Those assets can come in any form – real estate, cash, businesses, artwork, crypto, stocks, bonds…you name it. If it has monetary value and transfers from one generation to another, it counts as generational wealth.

You may also hear it called “family wealth” or “legacy wealth.”

How Generational Wealth Works

Anyone with financial resources to bequeath their family after they die has generational wealth, which raises an important point. While the term may conjure images of vast fortunes, royal families, and business magnates, any amount of money that you leave behind counts as generational wealth. So whether your estate is worth $100 or $100 million, it falls into this category.

Indeed, most wealth of this kind exchanges hands in the form of an inheritance. And, according to the Federal Reserve, between 1995 and 2016, over 55% of family inheritances in America were under $50,000 – a relatively modest sum by modern standards. By comparison, only 2% of inheritances exceeded $1 million. 

You don’t have to wait until death to enrich your children and grandchildren, though. There are various ways to pass money down during your lifetime. For example, you can gift a certain amount of cash each year, pay for your future heirs’ education, and cover their medical expenses – all without incurring Federal gift taxes.

Generational Wealth: Controversies

Generational wealth isn’t without controversy. For example, remember the previous statistic that just 2% of inheritances exceed $1 million? Well, while 2% sounds small, it represents over 40% of all the money passed down. In stark contrast is the 55% majority’s share, which accounts for approximately 6%.

The fact so much money flows to a small percentage of the population helps explain the growing disparity between rich and poor. In fact, the Federal Reserve says “intergenerational transfers” could be the source of a whopping 72% of the wealth possessed by the richest 10% of Americans.

Then there’s the racial component. According to another Federal Reserve report, white families are statistically more likely to receive an inheritance than other ethnic groups. Furthermore, the inheritance white families receive is generally larger than what other ethnic groups can expect.

How to Build and Protect Generational Wealth

Assuming those controversies haven’t put you off, there are five steps you can take to boost your chances of building wealth that lasts beyond a generation or two.

1. Improve Your Financial Literacy

The first step to mastering something is understanding it. Unfortunately, many people lack the financial literacy that’s so helpful in building and maintaining wealth.

For example, something simple, like knowing how to create a budget, can be a huge step in the right direction. The same goes for learning about compound interest, diversification, different savings vehicles, how to start a business, and so on.

Wrapping your head around key financial concepts will make wealth creation less of a mystery. It’ll feel more achievable as a result, which should also boost your confidence. If that sounds good, get the ball rolling by reading books on the topic, watching videos, and taking courses. You could even talk to a financial professional. 

2. Understand Taxes

Tax is the perfect example of how expensive financial illiteracy can be. It’s something that separates high-net-worth individuals from everyone else. They a) know how damaging taxes can be on one’s ability to build/protect wealth and b) use legal tax reduction strategies to minimize their tax bill each year.

Be like them. Seek advice to find out what methods of tax reduction might be available. From contributing more to your 401(k) to setting up a business to deduct allowable expenses from your tax bill, there could be many avenues to explore.

As an aside, it’s also worth noting the impact of tax on generational wealth. Depending on where you live and how much the inheritance will be, estate and inheritance taxes may apply at a federal and/or state level.

3. Increase Your Income

If generational wealth was a vehicle, income would be the fuel that runs it. Simply put, the more you earn, the easier it is to grow your net worth – assuming your expenses don’t climb at the same rate.

Obviously, increasing your income isn’t always a walk in the park! Yet by upskilling yourself, working hard, picking up extra jobs, starting side hustles, seeking a raise, and selling unnecessary possessions (while simultaneously reducing your outgoings), it won’t be long before your bank balance starts to grow. 

4. Start Investing Early

While it’s a crude simplification, there’s some truth to the phrase, “the poor spend, the middle-class save, and the rich invest.” Times are changing, but investing remains another financial process that wealthy people understand better (and do more effectively) than those of lower economic status.

Now isn’t the time for a complex rundown of the nuts and bolts of investing! Just know this: if your money isn’t increasing in value at the same rate as inflation, then you’re getting poorer every day.

Investing is the antidote – especially when you start early. The sooner you begin, the more time compound interest (i.e., the interest you earn on interest) has to work its magic. For example, if you invest an initial $1,000 now and then another $200 every month for 10 years, you’ll end up with almost $41,000 (assuming a 10% annual return). But if you do it for 40 years, you’ll have over $1.1 million.

5. Create a Wealth Plan

The saying goes that failing to plan is like planning to fail. And that’s definitely the case in the realm of building and protecting generational wealth. You should set financial goals and establish a plan for achieving them. But you also need to decide what happens if you (or a family member) fall ill or pass away.

Regardless of your current net worth or what you think/hope the future holds, you should create a will or trust ASAP if you haven’t already.

Work with a financial advisor to establish an estate plan that outlines how your wealth will be distributed in the event of your death. It’s the best way to ensure a smooth transfer of assets to your loved ones and future generations.

Start Building Generational Wealth Today

Like planting a sapling so future generations may sit in the shade, building generational wealth gives you the ability to bless your children, grandchildren, and even great-grandchildren with opportunities and prosperity. For the recipients, it’s like magic – a gift from the past that sets them (and their own families) up for the future. With any luck, this guide has provided a useful overview of the topic.

Find a Financial Advisor

Do you have questions about your financial future? Find a financial advisor who can help you enjoy life with less money stress by visiting Wealthtender’s free advisor directory.

Whether you’re looking for a specialist advisor who can meet with you online, or you prefer to find a nearby financial planner, you deserve to work with a professional who understands your unique circumstances.

Have a question to ask a financial advisor? Submit your question and it may be answered by a Wealthtender community financial advisor in an upcoming article.

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This article originally appeared on Wealthtender. To make Wealthtender free for our readers, we earn money from advertisers, including financial professionals and firms that pay to be featured. This creates a natural conflict of interest when we favor their promotion over others. Wealthtender is not a client of these financial services providers.

Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.

Author Bio

Danny is a digital nomad, freelance writer, and travel enthusiast who’s determined to make the most of his life. His new website, wisehealthynwealthy.com, is full of useful resources on a wide range of topics to help you do the same.