What Is Generational Wealth and How Do You Create It?

Generational wealth may sound like something reserved for the elite 1% of Americans, unattainable for everyday people. However, nothing could be further from the truth.

The term “generational wealth” simply refers to any assets passed on from one family member to another. This could include anything from a family business to stocks, savings, or real estate.

By building generational wealth, you can enjoy peace of mind knowing your family will have financial security even if you aren’t there to provide for them personally.

Your family can also enjoy the comfort that this brings, especially if they currently rely on you as a primary earner. But just how do you create generational wealth? This personal finance article can help.

What is generational wealth?

Generational wealth refers to assets that are passed down from one generation to the next generation. This could include investment accounts like stocks and bonds, savings accounts, life insurance policies, and even cash.

It could also include things like cars, real estate, jewelry, businesses, and heirlooms or collectibles. Anything with monetary value qualifies — it doesn’t have to be cash.

How to create generational wealth

Generational wealth can help families maintain long-term financial stability and spare individual members from undue hardship.

It provides a financial cushion to fall back on while also opening up options — for example, it can help future generations avoid student loan debt. The challenge in building such a buffer, though, is setting up wealth to survive multiple generations. This requires more than simple assets like savings.

Why? A savings account can be chipped away at and depleted over time. Plus, the money in it is very likely to lose value due to inflation. The key to building generational wealth is to invest in assets with growth potential. Here’s how you can get started.

Understand your 401(k)

A 401(k) plan is a type of retirement account with distinct tax advantages. You typically contribute pre-tax earnings to the account, reducing your taxable income (although some plans allow you to contribute post-tax earnings, referred to as a Roth).

Many employers will also match what you contribute to your 401(k) up to a certain amount. When you reach the minimum required age of 59 and a half, you can then withdraw from the account without any penalties (there are fees if you touch it before).

If you don’t need the money in your 401(k), you can leave it untouched and designate a beneficiary to inherit it upon your passing.

The beneficiary can then access the funds in the account or leverage it for other purposes — for example, it’s possible to borrow from a 401(k). To make the most of your 401(k), though, consider automating your contributions, ensuring steady growth over time.

Set up a trust fund

If you want to pass down assets like a 401(k), house, savings — anything, really — you need to do some legal paperwork. Estate planning is the process of determining what happens to your assets when you pass on.

Most people write a will to designate who gets what or set up a trust fund. A trust is a legal entity that holds property or assets, which can then be transferred to designated beneficiaries.

Although it’s a bit more tedious to set up and manage, a trust is usually a smarter option because it reduces gift and estate taxes on assets you leave behind.

It also avoids administrative fees associated with probate. This is a legal process that a will must go through before an estate’s assets can be distributed. It involves authenticating the document and paying debts and taxes on the estate.

Another benefit of a trust is that you can create it with strictly defined conditions. For example, you might set up a trust for your children in which they only receive their inheritance in set increments, ensuring they don’t blow all the cash at once. You might also specify that they only get access to their trust after reaching key milestones, like completing their college education.