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.
In this blog post, we’ll answer the questions, “What is generational wealth?” and “Why is generational wealth important?” We’ll also discuss how to create multi-generational wealth to help secure your family’s financial future.
Do you have questions about building family wealth with a comprehensive financial plan that considers your investments, taxes, and insurance? Schedule a call with us to find out how we can help you save and grow your money.
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.
How 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. Here are two key steps to focus on:
Invest In Yourself
Learning how to build generational wealth 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:
- Living within your means
- Maximizing your retirement contributions every year
- Paying close attention to your taxes
- Starting and growing a business, either to sell or pass down
- Protecting yourself against insurance and liability risks
Remember 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.
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.
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.
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.
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 individual retirement accounts, 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.
Building Family Wealth For Our Clients
At Bay Point Wealth, we want to help ensure your legacy will be carried on as you intend. We’ll work diligently to create a personalized, comprehensive financial plan for your family’s future. And, because we work closely with other professionals, such as estate planning attorneys, you can trust that your plan will be cohesive and effective.
Schedule a call with us today to find out how we can help you protect your hard-earned wealth and make sure it continues to grow.