How To Build Generational Wealth

Being wealthy in your lifetime is one thing, but being able to pass it down is another. The latter is called generational wealth, which is the ability to pass wealth to future generations. Building generational wealth is no easy feat, especially if you’re a first-generation wealth builder. However, it can help create financial freedom and open a world of possibilities for your posterity.

What Is Generational Wealth?

Generational wealth is about passing wealth from one generation to another, and that usually happens by transferring assets. Heirs may inherit a range of assets, including:

Stocks
Real estate
Retirement accounts
Life insurance proceeds
Businesses
Intellectual assets
Collectibles
Money or savings

There are many ways to pass these assets between generations. Here are three common approaches:

Trusts: One way to transfer wealth is a revocable or irrevocable trust. While revocable trusts can be amended or canceled, irrevocable trusts cannot be altered unless all the beneficiaries agree or there’s a court order in place. Using a trust can be beneficial because in some cases, it can minimize taxes. This means both the creator of the trust and those who inherit the assets can potentially pay less in taxes and have more wealth to pass down. Another benefit of trusts is that they provide the space for outlining how and when you want assets to be distributed.

Gifts: Gifts are another method of creating generational wealth. Gifting money or assets to your family is a way to help them build wealth while reducing your estate taxes. The federal government provides an annual gift tax exclusion, which is $18,000 per person per year as of 2024. Anything that exceeds that amount can be contributed to the lifetime gift tax exemption, which is $13.6 million in 2024. Another bonus of gifting is that your loved ones don’t pay taxes on those gifts.

Beneficiary designations: It’s possible to pass down funds in a bank account, investment account, or a life insurance policy through designated beneficiaries. These will usually override any requests made in a will.

How to Build Generational Wealth

Before you can pass assets to future generations, it’s important to acquire and nurture those assets. Here are some things you can do to start building generational wealth.

Improve Your Financial Literacy
For those who are starting from the ground up, one of the most important steps to building generational wealth is improving your financial literacy. This can be intimidating for people who aren’t confident with numbers or money. Start by being honest about where you are and taking inventory of your net worth, debt, income, and expenses. Once you have a clear financial snapshot, you can move on to learning the foundational aspects of personal finance like budgeting, maintaining healthy credit, and paying down debt. After getting a grasp of these concepts, you should have more cash available to acquire and grow assets.

For people who already have a strong financial foundation, the education may start with understanding how to expand their portfolio or diversify into new asset classes.

Establish Goals
Having clear goals for how to build wealth is an important part of the process. Your goals may be broken into short, medium, and long-term goals, which makes sense because building wealth typically takes time. A short-term goal may be to change jobs within the next year so you can start maxing out your 401(k). A medium-term goal may be to save enough money to start a real-estate business within the next three to five years. A long-term goal could be to own 10 investment properties within the next decade or two. Ultimately, your goals should be SMART: specific, measurable, achievable, relevant, and time-bound.

Devise a Strategy
Once you have your goals, mapping out a strategy for how to achieve them will take the goals from a wish to an actionable plan. You can develop this on your own or with the help of a finance professional. A strategy is the ‘how’ to your goals and should help you stay focused.

A wealth-building strategy should include saving and investing in many assets like stocks, bonds, CDs, and real estate. The types of assets you acquire will hinge on your goals, available cash to invest, and time horizon.

Stay The Course
Building wealth isn’t always easy, and you’re likely to face many obstacles along the way. Always remember why you’re doing it and the future generations you’re trying to help by building wealth. There may be times you’re unable to contribute as much or you may face financial losses, but you must stay persistent.