The desire to protect your family is strong. It’s why you work so hard to meet their everyday needs for food, clothing and shelter. This near-term financial stability is a real gift for your family. But what about their long-term security, especially after you’re gone? We’re talking about the gift of generational wealth.
What is generational wealth?
Generational wealth is the financial legacy that you’re able to give to your children or grandchildren upon your death, most typically:
- Cash located in checking, savings, money market or term accounts
- Tax-advantaged investments like 401(k)s, 403(b)s or IRAs
- Other investments, such as stocks, bonds and mutual funds
- Life insurance policies
- Real estate
- Family businesses
Building enough wealth to pass on gives your heirs a financial boost that makes life easier for them. Even a small can form the basis for an emergency fund, college savings or a down payment on a home that they can build on.
Some people even choose to give away some of their wealth to family members during their lifetime via individual gifts. If you stay below the IRS’ annual gift threshold per recipient for the year you give a cash gift, the recipient doesn’t pay federal tax on it. For example for 2024, gifts of $18,000 or less per person are not subject to federal tax.
Trusts are another way that people pass on their wealth to family members. With a trust, you arrange for a third-party, such as a financial institution, to hold your financial assets “in trust” for the benefit of your assigned beneficiaries. One of the primary benefits of a trust is that it typically allows your estate to avoid probate court upon your death, letting your assets pass to your heirs sooner and with less hassle.
12 Steps to Building Generational Wealth
Generational wealth doesn’t have to be only for the Rockefellers or Carnegies. These steps can help anybody build up financial assets to pass on to family members:
1. Become financially literate.
Familiarizing yourself with personal finance terms is the first step toward creating financial stability for yourself and your children and grandchildren. For example, knowing how to calculate your net worth or how dynamic pricing impacts your budget can help improve your financial situation.
2. Define your financial values.
Determining them is critical to building generational wealth. An example of a financial value is the prioritization of good debt whose low interest helps you build a strong credit history over high-interest debt that can hurt your credit score. You’ll want to explain your values to your children so they understand the reasoning behind your financial decisions and they realize the benefit of defining their own values as adults.
3. Graduate from college.
More education typically leads to higher earning power, and as aFederal Reserve study indicates, it increases the amount of wealth you have to pass on. Those with some college credits have only 30 cents for every $1 in wealth that a college graduate has. This goes down to 23 cents for those with a high school diploma and just 10 cents for those without that diploma.
4. Live below your means and save the excess.
At any income level, lifestyle creep can cause you to live beyond your means. Choosing to not only live within your means, but below them, leaves you with excess cash to save at every pay period.
5. Create and stick to a budget.
The best way to live below your means is building a budget and using budget rules that clearly define how much of each paycheck you want to allocate to essentials, non-essentials and savings.
6. Build an emergency fund.
Too often, unexpected financial expenses wreck people’s budgets and their ability to save. Maintaining an emergency fund worth three to six months’ of expenses protects your savings, and specifically allocating money in your budget toward predictable expenses like car and home repairs reserves your emergency fund for a truly unexpected financial crisis like being laid off.
7. Maximize contributions to retirement accounts.
Most employers that sponsor 401(k) or 403(b) plans match employee contributions to them, doubling your savings with each paycheck and helping you build up your wealth that much faster. What’s more, since your contribution is taken out of your paycheck automatically, there’s never a risk of spending the money on something else. And you enjoy the benefit of not having to pay tax on your account’s earnings until you withdraw the money in retirement.
8. Invest in the stock market.
Whether in your 401(k), a brokerage account, individual stocks or mutual funds, investing some of your money in the stock market is a proven way to grow it and build wealth over the long-term. The S&P 500 Index averaged a 9% annual return between January 1996 and June 2022. For its part, the Dow Jones Industrial averaged an 8.57% annual return for the 10-year period ending in January 2024. Consult with your financial advisor if you’re inexperienced or would like expert advice.
9. Make yourself more marketable for a higher paying job.
The more income you earn, the more money you potentially have to put into savings and invest. Adding new skills and perfecting existing ones improves your chances for promotion to higher paying jobs. It can also reduce your chance of being laid off, which can stall wealth-building plans.
10. Buy real estate.
Owning your own home, aka the American Dream, and passing it down to heirs is a tried-and-true vehicle for generational wealth because, as this chart shows, real estate generally appreciates in value over the long-term and during the time when you’re paying down your mortgage to create more equity in the property.
11. Start a business.
Passing down a financially healthy family business is yet another vehicle. Not only does this leave an asset for your heirs, but it provides steady income for the family members who run the business and others who actively work in it in other capacities.
12. Get life insurance.
It’s one of the easiest and surest ways to leave financial security for your family, especially should you unexpectedly pass away during your prime earning years.
Tips for Protecting the Wealth You Build for Your Family
No matter what form your wealth takes, protect your financial legacy with an estate plan that includes a will and financial power of attorney among other important documents. Additionally, always keep beneficiaries for your 401(k), life insurance and other accounts up-to-date. Finally, working with a trusted financial planner or tax advisor can help you protect your legacy. This is especially important if your wealth exceeds the federal estate tax threshold ($13.6 million in 2024).
