Take a look at the world’s wealthiest people and you’ll find a few self-made barons on the list, but a whole bunch of the world’s aristocrats have never known anything else because they were born swimming in money. It’s called generational wealth, and it’s not just for the one percent.
Average people who make smart decisions can give a leg up to their kids and grandkids by building wealth — even modest wealth — growing it, protecting, defending it and passing it down to give a boost to those who will follow.
That’s easier said than done, of course, but regular people from regular backgrounds can build equity in their homes, start businesses, make wise investments and — perhaps most importantly — learn, plan and seek professional help to make sure that what they build doesn’t get squandered by this generation or the next.
First Thing’s First: Talk It Out
Money is a subject that’s hard for many families to talk about, but avoiding uncomfortable conversations can spell doom for family finances.
“It requires open communication with family members, addressing topics that are personal in nature,” said John Smallwood, president of Smallwood Wealth Management and author of “It’s Your Wealth – Keep It: The Definitive Guide to Growing, Protecting, Enjoying, and Passing On Your Wealth.” “The successful families I’ve worked with over the years have had a willingness to be open with each other about the wealth that they’ve created. The more open the conversation, the better future generations will be able to avoid pitfalls and traps that place wealth under attack.”
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Enlist Professional Help and Pay Attention to Taxes
One thing that’s common to nearly all the people who successfully transfer wealth to succeeding generations is that they don’t go it alone.
“Historically, estate taxes have been known to devastate wealth,” Smallwood said. “It’s impossible to know what the trends will be in the future. Maybe you’ve accumulated a lot of your own personal wealth, then inherit money on top of that. Then you could end up in a higher tax bracket. With poor planning, you could be looking at 40% to 50% drains of wealth over multiple generations. Financial planners can help you be strategic and set up layers of asset protection — wills, revocable trusts, spousal lifetime access trusts, life insurance — in order to protect inherited money for you and following generations.”
Get Into the Business of Buildings
One of the surest ways to create generational wealth is through buying businesses with real estate attached to them, according to Jerome Myers, founder of the Myers Development Group.
“This allows them to skip the startup phase of business building and allows them to have something that is creating cash flow from the first day of ownership,” Myers said. “Our company executes against this strategy through the purchase of apartment buildings. As an owner of apartment buildings, you get to enjoy the cash flow from the building, create equity through forced appreciation of the asset and take advantage of the tax advantages of large real estate projects.”
Be Like Buffett — Invest in Boring
Big, sexy investments like real estate and crypto are exciting but incredibly uncertain. You’re likely to do better in the long run with investments that are much less thrilling but far more dependable.
“The best business in the world to invest in is property and casualty insurance,” said Alexander Lowry, a professor of finance at Gordon College. “This is Warren Buffett’s favorite investment vehicle. He writes about it in every annual letter. It’s the basis of his entire company. It drives nearly all of his investment return. You can achieve great wealth by focusing on insurance. Over the long term the best managed P&C firms more than double the return of the S&P 500. The best P&C companies consistently produce underwriting profits and generate realized investment returns, while growing float, book value and the inevitable asset base.”
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Develop Multiple Revenue Streams
The pandemic proved that those most likely to thrive through unforeseen challenges are not people with strong savings, but those who have money coming in from more than one place. That’s the kind of financial security that’s well-positioned to survive the generations.
“Young people should strive for multiple streams of income so they’re not reliant on one source of income,” said Xavier Epps, finance expert, Amazon #1 New Release author and founder of FinanceGuyX. “Young people have more skills and access to resources today than older generations — they can turn their hobbies into side hustles that can supplement their income. If their side hustle does well, they can consider leaving their 9-to-5 job and become a full-time entrepreneur with more control of their financial growth.”
Buy Life Insurance
The thing about generations is that you don’t get to choose when yours ends and the next one begins — but end, it will. Uncomfortable as that might be, you can take solace in knowing that your death can bring a windfall that can set your posterity up for success.
“The first thought that comes to mind on how to transfer generational wealth is through a life insurance policy with death benefit proceeds going to beneficiaries tax-free,” said Candida Hinton, investment advisor representative for Transamerica Financial Advisors, Inc. “The basis of protection and wealth preservation is insurance.”