What is generational wealth?

Definition and Example of Generational Wealth

How does generational wealth work?

How to build generational wealth

Passing on generational wealth

Definition and Example of Generational Wealth

Generational wealth refers to the assets that are inherited from one generation to the next. These assets can include investments such as stocks, bonds, family businesses, real estate, and other valuable items, and may help someone increase their net worth or wealth.

Definition and Example of Generational Wealth

Generational wealth, also known as “family wealth” or “legacy wealth,” refers to any type of family assets that are passed down from one generation to another.

Alternate names: Legacy wealth, family wealth, multi-generational wealth, intergenerational wealth

Many associate generational wealth with financial assets such as cash, stocks, bonds, real estate, and family businesses, but generational wealth can encompass more than just money and valuable property. It can also take the form of traditions, heirlooms, educational legacies, and relationships.

Note: Asset transfer typically occurs after the death of the family member who owns the assets. However, there are occasions when valuable items are inherited during the lifetime of the giver and the heir.

How Does Generational Wealth Work?

In one sense, generational wealth can be viewed as a form of financial planning. One of the main reasons for building generational wealth is to create significant financial resources so that you can help your children and grandchildren achieve financial success after your death.

When a large financial gift or assets are transferred from one living person to another, it is known as a living transfer.

Beneficiaries of Generational Wealth

Most generational wealth in the United States is generally received as an inheritance passed down after the death of a family member. As a result, families that build and transfer generational wealth to the next generation have a significant advantage over families that do not. For example, they may not face difficulties regarding financial matters, housing, or food security because they were given money or assets rather than having to work to earn money and build their savings themselves.

Note: Half of inheritances are estimated to be worth less than $50,000, while only 2% reach a million dollars or more.

A study conducted by the Federal Reserve showed that white families are more likely to receive an inheritance, and they also tend to expect to receive an inheritance. The data revealed that 30% of white families received an inheritance compared to 10% of Black families, 7% of Hispanic families, and 18% of families from other ethnicities. Additionally, white families also expect to receive relatively larger inheritances.

Home Ownership and Generational Wealth Gap

The ability to pass on wealth between generations is a topic that can arise in discussions related to wealth inequality and the racial wealth gap. Transferring assets such as homes and real estate or family businesses is a crucial part of building generational wealth.

For many families, owning a home is the largest asset in building wealth, but there are racial wealth gaps resulting from disparities in homeownership. For instance, in the fourth quarter of 2021, the homeownership rate for Black individuals was 43%, compared to 74% for whites in the United States, according to the latest report from the U.S. Census Bureau.

However, historical policies and practices in the United States, such as housing discrimination, redlining, and other forms of bias, have significantly impacted wealth-building efforts in communities of color. For instance, in Seattle, the standards historically followed by traditional lenders prohibited non-white buyers from obtaining the necessary loans to purchase a home.

This, along with the inability to access essential resources and services such as Small Business Administration (SBA) loans, academic support, and fair healthcare, has exacerbated the generational wealth gap in this area.

Note:

In addition to critique, real estate, and family businesses, providing educational opportunities is another example of passing down generational wealth. For instance, there is a strong correlation between higher education and greater earning potential. Therefore, a person who can enter adulthood with little to no debt because their family can afford to pay for their college education may have a significant advantage in accumulating their own wealth.

How to Build Generational Wealth

Building enough generational wealth to pass on to future generations starts with establishing a strong financial foundation.

Building your savings: Having an emergency fund will prepare you for unexpected expenses. Additionally, you can save for short-term goals like down payments on a home.

Investing for the future: Buying stocks, bonds, and other investment vehicles can help your money grow through the power of compound interest.

Paying off debt: Eliminating high-interest debt such as credit cards can be a beneficial strategy for building generational wealth.

Saving for retirement: Retirement accounts like 401(k) and IRA can provide tax advantages that can help you create financial security for retirement and enhance your potential to build generational wealth.

Starting your own business: Building a profitable family business can provide opportunities for you to create financial success and pass it on to future generations.

Buying a home: Homeownership is a key factor in building wealth in the United States. Owning a home instead of renting gives you an asset that can be passed down to the next generation as a place to live or even as a property to generate additional income.

Passing Down Generational Wealth

Some ways to pass down generational wealth from one generation to the next include:

– Through inheritance after death

– Transferring assets as a gift

– Paying for higher education costs

– Designating a beneficiary

– Purchasing life insurance

– Establishing a trust fund

– Having a last will and testament

Takeaways

– Generational wealth refers to assets passed down from one generation to the next.

– Most generational wealth comes in the form of inheritance passed down to heirs after the death of a family member.

– Real estate is the most common way to build generational wealth.

– Wealth inequality still plays a role in the generational wealth gap.

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Sources:

– Federal Reserve. “How Does Wealth Transfer Across Generations Affect Wealth Concentration?”

– Federal Reserve. “Differences in Wealth by Race and Ethnicity in the 2019 Consumer Finances Survey.”

– U.S. Census Bureau. “Housing Vacancies and Homeownership (CPS/HVS).”

– City of Seattle. “Equitable Communities Initiative.”

Source: https://www.thebalancemoney.com/what-is-generational-wealth-5270424