Everything You Need to Know About Generational Wealth and Building It

Updated · Oct 17, 2022

Generational wealth is the accumulation of assets by successive generations. It is often seen as a measure of success and stability for a family or community.

There are a number of reasons why it is important. First and foremost, it provides stability for your family and gives a head start to your descendants.

Whether you have some inheritance or are starting from the bottom, below you can find some useful tips on creating generational wealth.

But first, let’s start with the definition of generational wealth and some stats about its distribution in society.

What Is Generational Wealth?

The term "generational wealth" refers to any assets families pass down to successive generations. This can be in the form of cash, stocks, equities, bonds, property, or even whole businesses.

There are two types of generational wealth transfer: after death and during life.

Usually, it is transferred after death through inheritance. This can include assets, such as property, money, or stocks. 

However, people can pass down wealth while living as well. Most commonly, people give generational money and assets to their children as gifts. Another way to help out your successors is by covering their educational and medical expenses.

Taxes on Generational Wealth

Like any other type of income, generational wealth transfers are subject to taxes. Let’s see what is the case with transfers after death first.

As of 2022, the federal government applies an estate tax to assets over $12.06 million. Some states have additional taxesestate, paid by the person who transfers the wealth, and inheritance, paid by the receiver.

That said, relatively few states apply these taxes to generational money and property. The amount you might have to pay varies based on your location and relationship to the heir/deceased.

In terms of transfers during life, individuals giving away assets or property might have to pay a federal gift tax.

As of 2022, this applies only to sums over $16,000 per person. The amount varies depending on the size of the gift and the relationship between giver and receiver. For example, spouses are exempt if both parties are US citizens.

Other tax exemptions include fees paid directly to educational or healthcare institutions. That said, educational expenses, such as accommodation and books, can be taxed.

Who Has Generational Wealth?

Building generational wealth is no easy task. Let’s see who has succeeded at this task and why some groups of people have done better than others.

Baby boomers are the generation with the highest percentage of the US wealth, holding around 51% in 2021. Second in line are Gen X, with just under 29% in 2021. In comparison, Millennials hold less than 6%.

This is a drastic difference. Even when comparing Boomers to Millennials at the same age, the wealth gap is still big.

Why is that? Well, there are several factors that have contributed to this. The main ones are the rising costs of real estate property and education.

The racial generational wealth gap is a serious issue in the US.

The wealth of White households is eight times bigger than that of Black and five times than that of Hispanic families. The bigger problem is that the unequal opportunities that led to this gap will affect future generations.

Generational wealth by definition is the assets you pass down to your children and grandchildren. Hence, if one generation struggles financially, the next one won’t have it easy either.

On a more positive note, between 2016 and 2019, Black and Hispanic family wealth grew at a greater rate than White family wealth. On average, it increased by 32% for Black, 60% for Hispanic, and 4% for White households.

Still, the racial wealth gap is a looming problem passed down to future generations, which needs to be addressed.

Why Do We Need Generational Wealth?

The value of transferring money and assets to your children is in the definition of generational wealth.

But how does it help you now, in the present?

Generational wealth is important because it allows you to save money and invest in your future. Plus, you don't have to worry about your financial situation as much, which means you can focus on other things, like your career or your family.

Additionally, having generational wealth means that you're less likely to fall into poverty. It can be an excellent source of passive income. You could rely on it in case you lose your job or simply as an additional income.

Overall, it is a great way to secure your future and that of your children.

How to Build Generational Wealth?

Most people think that the best way to build generational wealth is through homeownership. There are a few reasons for this:

  • When you own a home, you can live in it for free and even rent out rooms to tenants to help cover the mortgage costs. This can generate a lot of passive income over time.
  • The cost of real estate increases over time. This means you or your heirs can sell your property for more than you bought it.
  • Owning a home gives you stability and security, which is especially important during tough economic times. It's much easier to weather the storm when you have a roof over your head.
  • When you own a home, you have something to pass down to future generations. This will increase their value and make their life easier.

That said, it’s also possible to create generational wealth without owning a home.

One way to do it is through stock market investing. That said, trading requires a significant amount of knowledge and has its risks. Make sure to do your research before you start.

Another valuable source of income that you can pass down to your children is a family company. You can start a business and let your children bear the fruits.

Still, whichever path to building generational wealth you chose, the first steps are the same.

Whether you decide to start saving for a downpayment for a mortgage or for a business, you need to know how to manage your money.

Saving, Budgeting, and Spending

One of the most important things you can do to build generational wealth is to develop healthy spending habits. This means creating a budget, saving for emergencies, and investing for the future.

Тo stay out of debt (or pay it off if you already have it) and save money, you need a good budgeting plan. 

The 50/30/20 rule is a good starting point. This means 50% of your monthly income goes for essential needs (bills, rent, food, etc.). Another 30% will go for wants,” and the remaining 20%for debt or savings.

Most importantly, you need to stick to your budget plan. This can be difficult at first, but it becomes much easier over time.

Saving for emergencies is also very important. Before you start thinking about generational money, you need to secure your present. If you have a rainy day fund, you will be less likely to go into debt if something unexpected happens.

After you have that covered, you can start investing. You can do this in a number of ways, but the most common is through stock trading.

When you buy stocks, you are essentially buying a small part of a company. If the business you chose is successful, your stock will increase in value. Then, you can either sell it or pass it down to your children.

It’s best to start small to get to know the market and invest what you can each month.

Savings Accounts

You can use savings accounts to put away money for short-term needs, such as a rainy day fund or a vacation. This is different from investing, which is for long-term needs, like retirement.

That said, a savings account can be a great way to create generational wealth. In it, you can put away money for your first big investment or a downpayment for a mortgage.

There are a few things to keep in mind when choosing a savings account:

  • Make sure the interest rate is high. That way, the money in your account will grow.
  • Look for an account that has low fees. Many banks charge you for things like ATM withdrawals and balance inquiries.
  • Choose an account that is easy to use. You don't want to have to jump through hoops to access your money.

Credit Score

A good credit score can be of huge importance when you start building generational wealth. It will help you get a competitive loan with a low APR, which you can use to buy a property or create a business.

There are a few things you can do to improve your credit score:

  • Pay your bills on time. If you’re late with payments, your score will drop significantly.
  • Keep your debt levels low. Having credit is not the end of the world. Just try not to borrow more than you can afford and pay regularly. This will boost your credit score.
  • Monitor your credit report. Check for errors in your report, which could be hurting your score.

Life Insurance

Many people think of life insurance as a way to provide for their families financially if something happens to them.

While this is certainly one of the benefits of life insurance, it's not the only one. It can also be a valuable tool to create generational wealth.

Even if you don’t have anything to leave behind for your family, your life insurance can help them in many ways. For example, they can use it to pay off debt or as a source of income after you pass away.

Another benefit is that it can protect your family from financial hardship. If they depend on you to pay the bills, you can keep providing for them after you’re gone.

Even if life insurance is not generational wealth by definition, it’s still something you can leave behind to make the life of your close ones easier.

Wrap Up

Generational wealth is the accumulation of assets across multiple generations. You don’t have to be rich to leave something behind.

You can start by saving money and making smart investments. With enough persistence and a little luck, you can end up buying a property or creating a successful business.

Aleksandra Yosifova
Aleksandra Yosifova

With an eye for research, Aleksandra is determined to always get to the bottom of things. If there’s a glitch in the system, she’ll find it and make sure you know about it.