Generation Wealth Definition

Wealth doesn’t stay in the hands of the same people forever. In most families, it gets passed from parents to children. Experts refer to this as “generational wealth.” 

In this post, you will learn: 

• The generation wealth definition
• How generational wealth gets transferred after death
• How generational wealth works when relatives pass along their assets during life
• The generational wealth gap

Read on to learn more.

Generation Wealth Definition

The intergenerational wealth definition is simple. It refers to the assets that the older generation of the family passes to the younger one. The assets may include family businesses, stocks, bonds, other financial securities, property, and commodities. 

Families achieve generational wealth when they can pay for all of their expenses through capital appreciation without touching the principal. Most families get to this point when their productive assets reach a capitalization of around $2 million. However, lifestyle factors also come into play. Those wanting more lavish expenditure will need to strive for a higher principal. 

Wealth becomes generational because of how it gets accumulated. The value of productive assets tends to compound over time. As older members of the family advance in age, the rate at which their wealth increases tends to rise. If they do not spend it, they can bequeath it to their beneficiaries, usually their heirs. If the beneficiaries take care of it (by adopting sound investment strategies and leaving the principal untouched), they may pass the same or more wealth to their children. 

Creating generational wealth requires taking specific actions and making the most of tax-advantaged accounts and related investment schemes. To build generational wealth, you will need to: 

Build a Profit-Generating Business That You Can Hand Down to Your Children 

Many of the wealthiest families in the country built a business first and then handed it down to their children later. Their companies became revenue and profit-generating systems that worked for many decades. The Census Bureau reports that around 90% of all enterprises in North America are family-owned.

If you own a family business, you will need to exercise caution before passing it on. Data suggest that only around 30% of family businesses are intergenerationally successful. Most fail.

To increase chances of success, older generations should keep younger ones in the loop of their businesses. Education must begin from an early age.

Invest in Real Estate and Create a Rental Business

You may also consider investing in real estate. Many wealthy families like to do this because it lets them pass something tangible to their children. Younger generations can then use the property for rental income.

Over the long run, house prices tend to rise with inflation. Real estate, therefore, is a good store of value. 

Invest in Generational Wealth Stocks That Will Generate Returns Over the Long-Term

The stock market offers higher returns than any other asset class over the long run. The reason for this is simple: when you invest in stocks, you’re investing in productive capital. As a result, you’re buying assets that will make you more money in the future. 

There are many ways to invest. The most recommended is to put your money into a low-cost, highly-diversified market-tracking ETF. You can also pay a mutual fund to manage money actively for you, though this will cost you more. 

Alternatively, you may also want to prioritize dividend investing if it is important to you that your stock investments earn an income. Dividend stocks pay you your share of the underlying firm’s profits every quarter. To build wealth faster, you will need to reinvest your dividends.

Use Life Insurance Policies That Will Help Pass Down Wealth if You Pass Away

Life insurance policies help maintain generational wealth if you pass away. Many insurers will provide eligible family members with a lump sum when you’re gone, which they can then invest.

Educate Your Child and Ensure That They Are Financially Literate 

Perhaps the most important thing that you can do, though, is to invest in the skills, experience, and education of the upcoming generation. 

Most intergenerationally wealthy families lose their wealth after a couple of generations. Thus, giving your children financial literacy will ensure that they understand why they should preserve the principal, how to accumulate interest, and how to manage a family business if you pass it to them. 

Why Is Generational Wealth Important? 

The reason is simple: it gives you and your family more options. Children who inherit generational wealth don’t have to spend their time working in jobs that they dislike for a paycheck. Instead, they can free themselves from the system and work on projects that genuinely interest them. 

Some families value other activities in life beyond work, such as travel, art, music, theatre, spiritual development, and philanthropy. Again, by the generation wealth definition, having a large enough pile of productive assets allows this. Family members can pursue their passions without any economic concerns. 

Generally speaking, it takes one or two generations to build wealth. For example, parents may be moderately successful, and their children could become extremely successful. 

Usually, though, generational wealth doesn’t last long. Studies suggest that 70% of wealthy families lose their money after one generation and 90% after two generations. This chimes with the Chinese proverb, “Rags to riches to rags in three generations.”

The generational wealth gap refers to the difference in wealth between older and younger generations. For example, estimates suggest that baby boomers — those born in the year immediately following WWII — are around 10 times richer than millennials. 

Generational Wealth Transfers After Death

Most generational wealth assets are transferred to the next generation in the form of inheritance after death. 

The benefits of generational wealth are actually quite small for the average American. According to data, most American families passed only around $50,000 to younger generations between 1995 and 2016 in the form of inheritance. Moreover, only about 2% of inheritance exceeded $1 million — accounting for around 40% of all the money passed down. 

Is generational wealth bad? The answer to that question depends on your political and moral persuasions. Some families believe that they have the right to pass their money on to whomever they like, while others think it’s wrong to give their children a life of luxury. 

The opposite of generational wealth is where families lose money over time. Given the fact that wealthy families tend to have huge investments at the start of their wealth journeys, it seems unlikely, but it happens with surprising regularity. The vast majority lose their wealth within one or two generations. Generational wealth and poverty appear to go hand in hand. Reasons include: 

• Inheritance tax
• Estate tax
• Lack of financial sense on the part of younger generations
• Dilution of the original capital among many family members
• Lack of sound investment planning and decision-making
• Unrealistic standards of living

There are many examples of generational wealth in the US and worldwide. Let’s have a look at a few of them:

Generational Wealth Transfers During Life

Older family members don’t always have to die before their heirs benefit. Instead, there are many ways that they can pass the baton before their time on earth is done: 

Medical expenses: Some families pay for heirs’ eligible medical expenses directly. This allows them to avoid gift taxes that would normally apply to such transfers.

Educational expenses: Older generations may pay for younger generations’ tuition. In the US, money parents pay to educational institutions on behalf of their children is exempt from gift taxes. However, other forms of transfer, such as payments for the room, board, and books, are not exempt. 

Gifts: In many cases, families will pass on gifts to their offspring tax-free. For instance, in 2021, heirs could receive up to $15,000 per person (or $30,000 per couple) without having to pay any gift taxes at the federal level. Couples with three children, for instance, could give the kids up to $90,000 per year tax-free. 

Downpayments on housing: Lastly, some parents assist with downpayments on their children’s housing, allowing the property to remain in the child’s name. This assistance helps the child get on the property ladder. 

Of course, how much money parents give to their children before death is entirely up to them. In some cases, they will transfer businesses into their heirs’ names before they die, potentially avoiding all inheritance and gift taxes. In other cases, they will pay the tax, particularly if they have a lot of money and their children have growing families requiring a cash injection. 

Achieving the requirements of generational wealth usually takes a long time. A family member may become highly successful in their career or launch a thriving business. When this happens, the family comes into money. If managed correctly, this money can grow either because of appreciation asset values or the increasing value of privately-held equity. 

Generational Wealth Gap

The generational wealth gap is the difference between the wealth held by older generations compared to younger ones. It exists because older people have had more time to accumulate wealth than younger people. 

A generational wealth gap chart can look quite extreme. So, let’s have a look at some stats here:

• In the US, the silent and older generations have around $817,000 in wealth per person, and baby boomers have $834,000 per person. 
• Generation X — those born between 1965 and 1980 — have around $440,000 per person, and millennials have just $68,800. 
• At the end of 2020, baby boomers held around $59 trillion in total wealth, around ten times the amount held by millennials. Generation X had $29 trillion in total wealth. 

Generally speaking, the wealth trendlines for younger generations have not been the same as for older people. Baby boomers, for instance, saw steeper increases in their wealth than both generation X and millennials over the last thirty years. Even though millennials are getting richer, the rate at which their wealth is growing is slower. 

Thus, the percentage of share of wealth is changing dramatically over time. In 2001, the relative share of household wealth between age groups was quite stable: 

• Those aged 40 to 54 and 55 to 69 had around 35% of all wealth. 
• Those above 70 had 20%, and those under 40 had approximately 10%. 

However, now the situation is different:

• Those over the age of 70 have seen their slice of the pie increase to 26%. 
• Those aged 55 to 69 now own around half of US total wealth, and millennials now have just 5% of the wealth. 

The asset distribution breakdown is interesting: 

• People under the age of 40 hold 37.9% of their assets in real estate — that’s much more than any other group. They also have the lowest share of equities and mutual funds — the assets most likely to generate long-term high interest rates. 

Generational wealth gaps in the US are likely to change dramatically over time, though. Financial experts predict that millennials will receive around $68 trillion in inheritances from baby boomer parents before 2030 — a staggering intergenerational transfer. 

Whether this money will increase wealth for millennials, though, will depend on how they use it. To grow their net worth, younger people will need to invest their money in productive capital, including generational wealth stocks, bonds, rental properties, and private equity.

It will also depend on distribution. The number of extremely wealthy families is actually quite small (compared to the population), so most millennials will not receive large inheritances. 

Eventually, though, prices will be back to normal, and millennials will find themselves in the same positions as boomers are right now. However, they have to wait until later in life to achieve the same level of financial security. The average millennial has a much lower net worth than a boomer of the same age thirty years ago. 

How generational wealth and poverty will affect generation Z is, at present, unknown. Those born between 1997 and 2012 have the lowest net worth of any group discussed above. 

The current wealth imbalance is potentially a threat to the economy. Society depends on wealthy generations spending money and having sufficient surplus to have children. The fall in marriage and fertility rates is partly due to the lack of intergenerational wealth transfer. Millennials are at prime family age right now, but they have far fewer children than previous generations because of the difficulty of accumulating wealth and becoming successful. 

There are several policies under consideration for reversing the generational wealth gap. One is to forgive more student debt. Currently, US millennials cannot rid themselves of debt incurred as part of their university fees. 

Another solution is to reduce gift taxes so that parents can transfer money to their children. However, this approach will likely prove unpopular since the wealthy will benefit the most. 

Other ideas include using wealth taxes to fund the education of disadvantaged groups so that they can earn the skills to find stable employment. Researchers believe that the key to long-term wealth includes: 

• A steady job and salary
• Consistent investment in assets over time
• Financial literacy

In Conclusion

Whether the generational wealth gap between old and young will continue to grow remains to be seen. However, likely, it will eventually balance out as boomers hand their assets in the form of inheritances to millennials. 

However, the distribution of money will be highly unequal. Not all boomers have large assets sitting by. The average inheritance is quite low at just $55,000, so many millennials will miss out on this windfall.