How to Build Generational Wealth for Your Family

When you’ve worked hard to create a good life for yourself and your loved ones, it’s crucial to make sure the wealth you’ve built stays in your family for the future well-being of your children and grandchildren. Knowing how to build generational wealth can be as straightforward as ensuring that your child will be able to pay off a student loan and make a down payment on their first home. Or, it can be as complex as establishing a multi-generational trust and setting up charitable giving initiatives.
What is generational wealth?
When you think of generational wealth (passing down money and assets to your heirs), it’s common to associate the concept with high net worth families who have created enough wealth that they’ll never have to worry about their financial future. However, building family wealth doesn’t look the same for everyone. In fact, it’s beneficial for anyone with a positive net worth to know how to create multi-generational wealth.
Every family has its own unique financial goals. A simple form of building family wealth could include leaving your house and a small life insurance policy to your children in your will and mapping out how to distribute your possessions when you pass away.
On the other hand, the greater your assets, the more complicated your legacy planning may become. You want to make sure you’re passing down wealth to your children in a way that will enable you to avoid unnecessary taxes. This is one reason why it’s essential to seek professional advice on how to build generational wealth.
Why is generational wealth important?
Leaving a legacy is important to different people for various reasons. You may want to make a positive, lasting impact on your community. Or, your number one priority could be to ensure that your heirs will have a great head start in life and won’t be burdened with any financial issues in their later years. In other cases, you may not wish to leave a large sum of money to your children.
One of the main reasons financial planning for future generations is so critical is that it can help protect heirs from unforeseen events for example, in cases of divorce or from outside parties such as creditors. You could choose to put a lifetime trust in place for your child to secure or increase their control over their generational wealth in a potential future marriage.
In other instances, you may want to protect yourself from liability. If your career carries a high risk of a lawsuit, it’s important to work with a financial advisor and attorney to ensure your assets are titled in a way that limits your liability exposure.
6 Ways to Build Generational Wealth
Part of knowing how to create multi-generational wealth includes setting realistic expectations and understanding that the process isn’t a get-rich-overnight scheme. Building family wealth properly takes time. It should begin with investing in yourself. Even if you’re starting from scratch, save as much money as you can while still allowing yourself to enjoy life, whether that involves traveling or spending time with your family.
Keeping in mind that most fortunes aren’t built overnight, you can explore numerous avenues to build your banking and investment accounts and your net worth. Consider these approaches:
1. Live Within Your Means
This is a simple but effective strategy for learning how to build generational wealth and it’s a necessary part of the process. Living within your means will vary by definition from person to person, but essentially, it’s about prioritizing your savings and managing your cash flow in a way that gives you the capacity to save and invest. It’s the opposite of spending all your money. Managing your expenses is a big part of successfully living within your means. However, this strategy goes beyond the financial tactics you can employ to build wealth. It’s also important to pass down the principles that are inherent to wealth building, so future generations can benefit from them too.
For example, involve your children in the conversation when you’re making purchasing decisions. You could say, “We’re going to forgo spending this money today so we can put it to work for the future, for your college fund.” Thought and choice play into all financial decisions, and sharing how you arrived at a certain outcome is the best way to provide your children with their own set of tools to build generational wealth.
2. Maximize Your Retirement Contributions
Contributing the maximum amount of money to your retirement accounts that you’re permitted to do on an annual basis is a smart wealth building strategy. However, the key is to not only maximize your contributions, but to understand your options. The financial options available to you regarding different retirement accounts could change depending on your employment or if you’ve decided to start a business. For example, a SEP IRA or a Solo 401(k) are two potentially effective options for business owners.
In addition, when your focus is on building generational wealth, if you’re maxing out taxable accounts that have no restrictions and no penalty for withdrawing money early (as opposed to an Individual Retirement Account or IRA, for instance), you must have a certain degree of discipline to accomplish this successfully.
3. Pay Close Attention to Your Taxes
Paying the least amount of tax that you’re required to pay is an important part of building generational wealth but you need to work with a professional to accomplish this in the most effective way possible. When you begin to accumulate wealth, your financial circumstances can grow in complexity much sooner than you may anticipate. So, having a professional on your side who’s familiar with taxes is a huge help. They can advise and guide you to ensure you’re not paying more than you need to, and can help you make decisions today considering the tax implications those choices will have in the future.
4. Start and Grow a Business
Entrepreneurship isn’t for everyone, but it is one of the top ways to build significant wealth. Of course, with the potential for great reward comes a high level of risk. To stay the course, you must have patience, discipline, a belief in yourself, and a commitment to the business and legacy you’re creating.
Starting a business is a fantastic way to pass down many valuable lessons around patience, discipline, self-belief, and commitment to the next generation as you lead by example. These lessons would serve anyone well in their financial life. It’s also essential to remember that success in business is not guaranteed, and starting a business and failing is just as valuable of a lesson as starting one and succeeding. The takeaway is in your ability to overcome challenges.
5. Protect Yourself Against Risks with Insurance
Risk management is the foundation of building wealth. Without it, you’re needlessly exposing yourself to liabilities that could cancel out any steps forward with equal (or additional) steps back. It’s like rock climbing without a rope, a tricky feat unless you’re Alex Honnold! Instead, protect yourself where you can. Use the proverbial rope as your lifeline.
6. Invest in The Stock Market
Once you have saved some money, you’d be wise to invest in the stock market. This is the most common and widely accessible way to grow your net worth. Investing is so effective because of the power of compound interest (interest calculated on an initial deposit, including accumulated interest). Your wealth can grow exponentially if you save and invest your money thoughtfully. The sooner you can create an investment plan; the better chance you have of building family wealth.
You can explore several different portfolio management strategies and models, depending on your goals, risk tolerance level, and financial situation. These include:
• Aggressive investing, such as buying stocks in fast-growing companies
• Defensive investing, such as only including cash and bonds in your portfolio
• Balanced investing, landing in the middle of aggressive and defensive investing
• Active investment management, paying someone to oversee your portfolio
• Passive investment management, such as index investing
• Factor-based investment management, a more cost-effective and tax-efficient variation of active money management
Regardless of the investment strategy you choose, remember to diversify your portfolio to minimize any unnecessary risk. As well, try to be patient throughout the process of building family wealth and lean on your trusted advisors, such as financial planners and lawyers, for advice and insight.
How to Distribute Generational Wealth
Distributing your wealth properly is equally as important as building family wealth. Inherited assets can cause a great deal of stress for heirs, so it’s crucial to ensure the transition goes as smoothly as possible prior to or upon your passing. The first step in this process involves working with a financial advisor and an estate planning attorney to create a legacy plan. If you have a large estate, this will be a carefully calculated process.
1. Establish Trusts
As previously mentioned, setting up trusts during your lifetime can be useful, depending on the complexity and size of your estate. Think of these trusts as a set of instructions to guide and/or control your assets in the event of your death or the death of your spouse. Trusts can be as simple as having a piece of property titled into the trust that will flow to your heirs or as complicated as owning multiple investment accounts and properties involving complex marital planning and generation-skipping trusts.
Alternatively, if you have a large estate and wish to donate a portion of it to charity, you may opt for a charitable remainder trust, which can reduce the size of your taxable estate. Or, if you are a business owner with a rapidly growing company, you can leverage other tools to minimize or freeze a portion of the increasing value for estate tax planning purposes, such as intentionally defective grantor trusts. These tools can help you defer or avoid estate taxes that could possibly be due upon your death if you are above the estate tax exemption.
2. Coordinate and Communicate Your Estate Plan
It’s also essential to coordinate your estate plan with any of your assets that have beneficiaries designated to receive funds. These assets typically include IRAs, 401(k) plans, and life insurance policies.
While it’s not necessary to disclose the amount of your estate, those involved in your estate plan should know who to contact if anything happens to you. Making sure you have a team in place looking out for you can help facilitate smooth communication around your estate plan, so your heirs know where your assets are located, how they’re titled, how you want them distributed, and the tax implications that may be involved.