What Is Generational Wealth and How Do You Build It?

two females and one male of different generations gathered around the table putting coins in piggy bank

Generational wealth is wealth that you accumulate and pass down to future generations. There are different ways to create and share generational wealth while you're alive, and you can also set up your estate to continue your legacy after you pass.

What Is Generational Wealth?

Generational wealth can encompass different types of assets, including savings, investments, property, collectibles, heirlooms and businesses. The key component isn't the asset itself—it's that you're passing on assets to future generations of children and grandchildren.

The transfer of wealth between generations has also become a central component of discussions about wealth inequality, particularly in relation to racial wealth gaps.

For many families, buying and passing down homes, businesses and property are core components of generational wealth. But certain past policies and actions in the United States―ranging from slavery and redlining to the seizure of property from Japanese-Americans during World War II—have hindered communities of color in their efforts to amass and pass on wealth.

Today, about 17% of white families expect to receive an inheritance compared to 6% of Black families, 4% of Hispanic families and 15% of other families, according to the Federal Reserve. Despite inequities and challenges to building wealth, there are steps you can take to begin creating a financial foundation to share with future generations. Here's how.

How to Build and Pass On Wealth

You may have received gifts or an inheritance that helped you get ahead, or you could be the first in your family to have the opportunity to pass on wealth. In either case, building enough wealth to share starts with having a solid financial footing for yourself. Here are ways to get there:

  1. Pay down high-interest debts. Sometimes it makes sense to invest rather than pay off certain debts more quickly, or to do both simultaneously. But generally, you want to make high-interest debt, such as credit card debt, a priority. There are several good strategies to pay down credit card debt; choose the one that works best for you.
  2. Build savings. Creating an emergency fund for unexpected expenses and additional savings for short-term goals such as a car down payment or holiday spending will help you avoid turning to debt when you need money.
  3. Save for retirement. Don't put off retirement until the last minute. You can continue building your savings and investing for retirement while paying down debts. Even if you don't end up giving the money directly to your heirs, having a well-funded retirement account can relieve some of the financial pressure your children may face as you age and give them space to build their own wealth.
  4. Invest your money. Depending on your risk tolerance and strategy, you could look into stocks, bonds, cryptocurrency, mutual funds and other types of investments you can make outside of retirement accounts. Consider that the time horizon for investments you plan to pass on might be much longer than for your retirement funds.
  5. Purchase property. Buying a home rather than renting can be helpful if you want to pass on generational wealth. Future generations can live in the home or rent it to have an additional income stream. If you have the extra funds, you could also look into purchasing investment properties that can create additional income sources.
  6. Start a business. If you're entrepreneurial-minded, a family business can offer multiple opportunities for creating and passing on wealth. In addition to having a business that future generations can take over or sell, you may be able to employ your children. Your business can write off their pay as an expense, while the child's earned income can qualify them for a tax-advantaged IRA that they can use to build wealth from a young age.

Ways to Pass Wealth to Your Family

Amassing wealth during your lifetime is important if you want to leave a legacy. But you'll also want to consider how you pass it on. Preparing ahead of time can help save future generations lots of time (and potentially money) after you pass.

  • Help pay for higher education. One option is to help pay for your children's and grandchildren's educational expenses. Every dollar they don't have to borrow is one fewer dollar that's accruing interest.
  • Buy life insurance. A life insurance policy can help ensure that your partner or children receive money when you pass, even if you don't have savings or investments.
  • Designate beneficiaries. Name beneficiaries for your bank and investment accounts so you can control who gets what. The assets can also then be transferred without going through probate—the potentially long and expensive process that involves a court publically transferring assets from an estate.
  • Form a trust. You can also create and put assets into a trust fund. There are different types of trusts, and these can also help you pass on wealth while avoiding probate.
  • Draw up a last will and testament. Your will can let you clarify how you want assets that don't have designated beneficiaries and aren't in a trust distributed, and who you want to care for your children if they aren't already independent.

Many of these are components of estate planning, which can be a complicated process that you should revisit multiple times. You can also look into getting professional help from attorneys and financial advisors who specialize in estate planning.

Educating the Next Generation About Wealth

Passing on money won't lead to long-term generational wealth if it's quickly squandered. While you can't control how other people view or spend money, you can help teach your children about personal finances and demonstrate best practices.

  • Discuss the importance of budgeting, saving, investing and giving to charity.
  • Give them opportunities to practice.
  • Show older children how debit and credit cards work.
  • Share the mistakes you've made and what you've learned as a result.

The conversations can shift as your children age and have families of their own. You might want to discuss your plans for the family home, business and retirement—and how much help you can offer or support you'll need.

The Bottom Line

Generational wealth is wealth that passes down from one generation to the next. It can come in different forms, such as paying for a child's education or passing on a valuable collection of antiques. However, you need to build wealth of your own before you have something to pass on.

Being able to get favorable rates and terms on a loan can be important when you're accumulating wealth, especially if you plan on buying a home or business. And your credit score can be a major factor in these decisions. You can monitor your Experian credit report and FICO® Score for free with Experian, and get suggestions for how to improve your score.