Some people will tell you that if you die penniless or even in debt, you’ve won the game. You lived your life to the fullest and gave a big “screw you” to the man on the way out. I….am not one of those people. For one, your debt doesn’t go away when you do. And two, I want the wealth I’m creating to go beyond my lifetime. I want my kids, my grandkids, and my great-grandkids all to benefit from the foundation I’m trying to lay down. I’m looking to build wealth beyond myself and create generational wealth.
What is Generational Wealth?
Generational wealth is quite simply any assets passed on from one generation of a family to the next. Assets can be any combination of cash, stocks, bonds, other investments, real estate, etc. The assets don’t need to be worth millions of dollars to be considered wealth. In fact, for most families in the United States, the amount passed on to the next generation is relatively small. Making the amounts even smaller in some states are estate and inheritance taxes.
Transferring Wealth During Life
You don’t need to kick the bucket before your lineage can benefit from your wealth. There are several ways to help the younger generations during your lifetime. Some of the more common methods are:
- Gifts – In 2021, families can give $15,000 per person or $30,000 per couple without getting taxed. This can be in the form of money and\or property. For example, if you have two married children, you could gift each of them up to $30,000 each, and they wouldn’t need to pay uncle sam a dime. Gifts like these are typically put aside for major life milestones such as getting married or a downpayment on a couple’s first home.
- Education – Paying the tuition of the younger generation is also a common way of using generational wealth while still living. Any tuition paid directly to an educational establishment can be done tax-free. Expenses such as room and board, books, meal plans, etc., aren’t tax-exempt, but that’s what we have 529b plans for.
- Medical Expenses. Similar to educational expenses, any medical fees paid directly to a medical services provider can also be done without incurring any taxes.
Why Is Generational Wealth Important?
Building generational wealth may or may not be important to you. If it is important, the reasons are likely similar but not the same as to why it’s important to me. For as much as I’d like to be able to live a nice cushy lifestyle, my goal for generational wealth all boils down to future generations. I want to create the foundation for my heirs to do what they want with their lives from the very beginning. I’m hopefully doing all the hard work, so they don’t have to. If I had my way, neither of my children would pay a cent for:
- College Education
- First home downpayment
- Their kid’s college education(529bs can be transferred to grandkids, fingers crossed for scholarships!)
This can’t wait for me to pass away. Seeing that my goal is to live as long as possible, my hope is my heirs are already in their 60’s by the time I’m gone. Yes, I can help with many of these things while still living, but the biggest thing for me is to allow them to pursue their dreams without the fear of needing money to survive.
This doesn’t mean I plan on just paying for their lives. My goal would hopefully be to keep them out of debt and give them money\property that will create enough income for them to live a modest lifestyle. Then they do whatever makes them happy to earn a living.
How To Build Generational Wealth
Knowing what generational wealth is and why it’s important is all fine and dandy, but the real heart of the matter is how to create it. Luckily, the strategy to creating generational wealth is no different than creating wealth for ourselves. The trick is to not burn through all of it yourself.
Investing in the stock market remains one of the best, if not the best, way to create wealth for you and future generations. We’re not talking crazy get-rich-quick schemes here. We’re talking about making intelligent, proven investments. A solid mix of stocks, index funds, mutual funds\etf\ bonds, and other investments that will grow over the course of 10, 20, or 30 years is a great way to build wealth. Living off these investments and then passing them on to the next generation is a solid strategy to lay the foundation for generational wealth.
Of course, saving should be part of your strategy for building generational wealth as well. Building wealth, to begin with, would mean saving money in the right places. You’ll never build wealth if you are out there spending all your hard-earned cash on fancy cars, expensive vacations, and other purchases that are mainly used to flaunt status. Instead, focus on what makes you and your family happy. If you do this while putting aside money, you’ll be setting yourself and your family for success.
Owning A Small Business
Not everyone is cut out to be their own boss, but for those of us who are, owning a family business is one of the best ways to transfer generation wealth. Starting your own business can be one of the scariest and most challenging things you might ever do, but if you are successful at it, you’ll be glad you did. Not only will you be your own boss, but you’ll be able to pass that down to your children. You’ve already done all the hard work of getting it up and running. Now they will be task with keeping it going and hopefully growing the business.
If that’s not for them, you can always sell the business and use that money to live off in your retirement and help set up your children for their own success.
Owning Real Estate
Owning real estate doesn’t mean you have to own investment properties. It simply means you own any real estate to pass along. This could just as easily mean your primary residence. There are several ways owning real estate can help create generational wealth.
The most beneficial would be owning investment properties. Passing along a proven source of income, you’ll already be giving your children a leg up. They can choose to continue running the property and collect rent or sell for a lump sum to hopefully make other investments.
If you don’t own an investment property, your primary residence is also an excellent asset to pass down. During your lifetime, you may choose to downsize where you live. However, that doesn’t mean you have to sell your current home. If possible, you can move into a new home and let one of your children move into your current residence. You may choose to charge rent or let them own it flat out, but in either case, they will not be a financially burdened as their peers.
When your time on this earth is up, owning a primary residence and not renting will also help pass along your wealth to the next generation. Unless you are underwater with your mortgage, your children, at the very least, will be able to benefit from the equity in your home. If they so choose, they can also use the residence as an investment property moving forward.
A custodial account is a savings account at a bank, brokerage firm, or any other financial institution managed by an adult for a minor. Creating a custodial account is a great way to create generational wealth. The most significant factor in investing isn’t how much you invest but how long you invest. The sooner you open an account for them, the better. Even amounts as low as $20 a month for the first 18 years of their lives can make a huge difference when it comes to your children’s financial future.
Have Life Insurance
Having a life insurance policy is not just a good idea to help create generational wealth; it’s just a good idea in general. You never know what can happen, and having a life insurance policy will ensure your family is taken care of no matter when it’s used. If you’ve already set you and your spouse up to live comfortably, change the beneficiaries of your policy to your children.
Make Sure you Have a Will\estate Plan
Don’t do all the hard work of creating wealth to have it fall apart at the finish line. Instead, make sure you have a will or estate plan to ensure your assets are distributed exactly as you want them to be when the time comes. Under the wrong circumstances, much of your estate could wind up going to the state and not to future generations.
Teach Your Children the Right Mindset
Now here comes the hard part. You can do everything right. Have the right mindset, invest correctly, spend wisely, all that good stuff. But, you can’t control what is done with all the money you’ve accumulated after your gone. It would be great if we could haunt our kids, whispering in their ear not to foolishly use all the wealth you’ve created for them, but unfortunately, it can happen, so what to do?
The first step is to educate yourself; step two is to educate your children on the value of money. As I stated earlier, my plan isn’t to simply hand over gobs of money to my children. I want them to earn a living, I just want them to be able to do so in a way that will make them happy without the constraint of money on their shoulders. Teaching them about budgeting, investing, and everything else I’ve learned during my lifetime will be essential in keeping the generational wealth going.
Hopefully, the next aspect is teaching my children how important it will be to teach their children about the value of money and whatnot. Hopefully, I’ll still be around to pass along a few nuggets of knowledge to my grandchildren, but there is only so much one guy can do, right? Making sure my children have the right mindset and financial tools will help ensure my grandchildren will at least have good role models when it comes to finances.
Generational wealth can be achieved no matter how much you pass along to the next generation. Obviously, we’d all like to set up our children to be better off than us and their children better off than them. By laying a solid foundation, you’ll hopefully be setting up future generations of your family for success. How they grow up to handle their money and teach the next generations will likely be out of your hands. All we can do is enjoy our time with them and give them the best possible future.
Jeff is a fan of all things finance. When he’s not out there changing the world with his blog, you can find him on a run, a Mets game, playing video games, or just playing around with his kids.