December 13, 2023

How to Build Generational Wealth in Six Steps

Many parents I speak with would like to leave something to their children after they pass. They’d like for their children to have an easier and more carefree existence than they did. A little extra financial stability might provide that. These are six steps to take to build generational wealth.
1. Talk About Money
Many families have a complicated relationship with money. This can lead to money being a taboo topic. If you want to foster a healthy relationship with money in the next generation of your family, it’s important to embrace the topic of money, provide lessons, and share your experience. Children get queues from their parents about how to feel about money. Money lessons can be as small as offering your child a weekly allowance and helping them with their budgeting for things they want and need instead of buying whatever they ask for.
2. Invest for The Future
Many wealthy people I meet have done big things like built a company from the ground to eventually sell it and then… sit in cash. It is understandable to want to protect money that you’ve worked so hard to grow over time but remaining in cash over many years is an easy way to lose purchasing power and diminish that wealth.
Instead of holding the sales proceeds without reinvestment, invest funds with a goal in mind. Is the goal to grow money as much as possible over time to pass it to the next generation? If it is, then you may have a portfolio that is more heavily invested in stocks, which tend to appreciate significantly over time. It’s ideal to only have enough cash for three-six months of emergency reserves and for planned major purchases within two years.
3. Use Debt Responsibly
Like teaching your child about budgeting, encouraging your child to have a healthy relationship with debt can do wonders for wealth creation. Consider speaking with your child about what different lines of credit mean and keeping your own utilization ratio low. When your child turns 18, talk to them about opening a college credit card to responsibly pay off regularly. If they’ll need any school loans, walk through the applications with them, explaining implications of the interest rates and directing them to resources to learn more.
4. Have an Estate Plan
Estate planning is the process whereby individuals decide how their assets will be managed or distributed in the event of incapacitation or death. Having an updated and funded estate plan can allow not only the most wealth to pass to the next generation, but it also protects families from the arduous and painful process that is probate. Consult a qualified estate planning attorney to prepare your plan.
5. Use Life Insurance
Life insurance provides a tax-free death benefit for the next generation in the event of your death. Even if you haven’t been able to accumulate many assets for the next generation during your life, the death benefit from a life insurance policy can create wealth where none existed before. Consult a qualified insurance agent to find the type of life insurance that would work best for your family.
6. Use The Laws in Your Favour
Tax and estate laws are subject to change but there are many ways that people can optimize what goes to the next generation. Currently, when you pass away, some of the least tax-efficient assets for your heirs would be pre-tax retirement accounts. Most heirs of a retirement account will be forced to distribute the assets within 10 years and pay the associated income taxes. When I speak with people, I encourage them to plan to spend down their pre-tax retirement accounts during life and if they want to pass some assets on, considering their non-retirement investments.
Investment portfolios and properties receive a step-up in basis upon death, meaning that the heir’s tax basis in the asset is equal to the value of the asset at death. This means the heir would be responsible for no capital gains taxes if they sold the asset immediately at the date-of-death value.
It can be difficult to know where to start when it comes to creating generational wealth. Speaking with your children about money, investing for the future, moderating debt, having an estate plan, utilizing life insurance, and using current laws in your favour are steps you can take to create generational wealth.

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