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Best financial tools for families to build generational wealth

Generational wealth is rumoured to disperse by the third generation. This is due to a lack of financial literacy about its preservation. While many families know how to accumulate generational wealth, most do not know how to retain or maintain it to pass it on to their successors and secure their financial future.

Learn from our article about generational wealth and what financial tools can help you achieve it:

What is generational wealth?

Generational wealth refers to financial assets that can be passed down to future generations. Examples of generational wealth include financial assets like property, investments, money, or anything of monetary value that is passed down from generation to generation. Intangibles like financial education, ethics, and habits are all important factors to consider. Your children can inherit your wealth, or you can pass it to them while you're still alive by employing a variety of financial planning techniques.

Understanding generational wealth

Generational wealth isn't always a lot of money, either. It varies a lot depending on the person's income, inheritance, and the economy of the country. The median net wealth in European households varies between €51,400 in Germany to €397,800 in Luxembourg, with the euro area figure standing at €109,200.

In Europe, wealth distribution is varied. Wealth is becoming more and more concentrated. The wealthiest 10% of European households account for no less than 51% of overall net European wealth. The wealthiest 1% of Europeans control 19% of overall European wealth.

Why is generational wealth important?

There's no denying that having a lot of money opens up your options. It is easier to pursue your dreams when you don't have to worry about making ends meet or quitting a job that isn't satisfying you.

Getting ahead in today's economy can be difficult, but family wealth can be a boon. Beneficiaries might benefit from even small payments since they allow them to live more comfortably and, in certain cases, avoid taking on debt for things like schooling and housing. There are many more benefits. By lowering financial stress, receivers of generational wealth are able to do things like invest for the future. There are many thousands of dollars in savings that can be accrued over the course of a lifetime.

Because of this, those who do not receive money from their forefathers miss out on these possibilities. People who take on additional debt face an even greater financial burden in the long run because of the interest they accrue.

Challenges of building generational wealth

When it comes to parents, it's a given that they'll work hard and pass on their wealth. However, this is unlikely to be the case in the majority of cases. Multiple studies and opinions have proven time and time again, that hard work rarely leads to gathering financial riches.

An estimated 70% of generational wealth is lost by the second generation, and 90% by the third generation. This is either due to the later generations' lack of understanding of money or a lack of communication about it within the family.

One-third of households in the 13 European countries surveyed say they got an inheritance, and those inherited households have much higher net wealth than those who did not receive inheritances. When a family receives an inheritance, it typically increases net wealth by 14%.

A common sentiment among parents who themselves came from humble origins is that they don't want their children to go through poverty. However, it is difficult to strike the correct balance. It takes more than money to build a legacy of prosperity that lasts more than one generation.

How to build generational wealth

Building generational wealth is not a one-size-fits-all method. There are a multitude of ways through which you can start the journey of building your wealth. Below are some examples of what you can do to start building your wealth for the next generation.

Create your lifetime financial legacy

There are some things you must expect on your journey to creating generational wealth. Firstly, you will have to consider the expenses of the next generation, especially for their colleges and universities, since the cost of education is also going up. You may also have to help your children with costs if they struggle with meaningful employment after graduation or become disabled. Therefore, securing a large portion of living costs for adult children for any emergencies will allow the next generation to focus on more important things in their lives, such as further education.

Furthermore, research has also shown that households in higher income brackets report getting a higher amount of inheritance or gifts. Low-wealth households got an average of $295 (in Latvia) to $11,052 (Belgium). The average inheritance amount or gift for households in the wealthiest quintile ranged from $30,441 (in Hungary) to $525,879 (in Austria).

You can leave a financial legacy by doing other things like bequeathing money to charity or lending a helping hand when times are rough. Start by deciding what you want to pass on and then having a conversation about it.

Integrate your financial legacy goals in your budget

Depending on your current and future needs, you will need to set up a budget that integrates your financial goals and current financial situation. If your goal is to save to buy a house, setting up a savings account would be the first action. If your goal is to set up savings for your children's education, education saving plans with tax benefits would be the way to go. The same can be applied to other plans, such as planning for a vacation. The aim is to set a budget based on your financial legacy and proceed to save up for it.

Pay your debts and create an emergency fund

Before planning for the future, it is critical to pay off high-interest debt and accumulate an emergency fund. For starters, paying a significant amount a month on interest alone on a larger amount of debt is a bad idea. Whatever you do to help yourself get out of that position is an investment. If you have an emergency fund set aside, you will not have to dip into your retirement savings to pay for unforeseen expenses.

Create multiple streams of income

If you do not have a high income, you are probably living paycheck to paycheck. While it is possible to invest with little money, you may find it rewarding to add a few sources of income and invest what you do not need to fund your living expenses.

But you should consider a few things before you take on multiple jobs. If you have a full-time job, having many side jobs might have a negative impact on your productivity, especially if you rely on benefits like health insurance. In addition, it might contribute to work exhaustion. As a result, you should only work on a handful of projects that you are sure will bring in money.

When your income increases, resist the urge to inflate your lifestyle. Any extra money should be invested in long-term goals, such as building a legacy for future generations.

Get input from financial experts

Leaving a financial legacy can be an enormous task. With the help of a financial expert, you can avoid mistakes that could otherwise derail your goals.

While advisors at independent investing firms frequently require a particular level of net worth to consult with you, those at banks are far more accessible. Naturally, they'll steer you toward their services, but this isn't always a bad thing if you're new to investing. However, it is preferable to work with a fixed-fee financial professional rather than a variable rate-based one, as variable charge rates can be quite expensive and advisers will be more apt to squander your time and money. A financial professional who is compensated at a set rate will act in your best interests because there is no financial motive other than the fee.

Leave documents to protect your legacy

If you do wish to leave something to others, consider leaving documents to protect the interests of your next generation and your legacy. You can do this through a will or a trust. A will is the most fundamental estate planning tool. If you have small children, a will enables you to indicate your preferences for their care. Additionally, you can identify your financial holdings to assist your family members in locating them. Without a will, you cede control of your children, property, and possessions to the state.

But it might be challenging to leave your possessions to others through a will, so you can choose to incorporate a trust into your estate plan. A trust is a legal structure that can be used to hold and distribute assets to beneficiaries, and it spells out who is accountable for carrying out your intentions. While trusts might be costly, they also provide additional benefits, such as avoiding or minimising estate and gift taxes, depending on the amount of your estate.

Proper estate planning is critical for generational wealth transfer. As a result, it's critical to talk with an estate attorney to verify that your estate plan is sound.

Instil good financial habits in your children and maintain good relationships with them

Generating money for future generations might be difficult because fortunes don't last as long as one might expect. This occurs as a result of the fact that people who inherit large sums of money often have no idea how to manage them. This is why it is so important to instil good money habits in your children. There are many simple ways to do this, but one of the most straightforward ways is to communicate about money with your children.

Of course, good family ties cannot be replaced by wealth passed down through the generations. Your descendants will appreciate and value your efforts even more if you take the time to cultivate strong interpersonal ties. It is possible that these ties will be more important to your heirs than the money you leave behind.

Invest for building generational wealth

Here we look at three financial tools through which a family can preserve their generational wealth to pass it on to their successors:

  • Family investment companies
  • Family Office
  • Non-traditional platforms

Family investment company

A Family Investment Company (FIC) is a family business mostly relevant to the United Kingdom. It is a private company where family members are the shareholders. It is an alternative investment vehicle to a family trust where the parents create family wealth in a tax-efficient manner and plan future succession for their children. It could be both a limited or an unlimited company, but most opt for registering an FIC as limited companies due to its limited liability protection. Families can put cash or assets in that company, create shares, and then transfer the financial wealth created to the children and their generations to come.

FICs are beneficial to build generational wealth because it allows parents to retain control over the assets in the company. Parents, therefore, can be the director or the majority shareholder, retaining all the voting rights. However, they will not have any rights over the financial wealth itself because they are not the ultimate beneficiaries - their successors are. Their successors will be entitled to financial dividends, profits from those shares, and other wealth generated. Hence, the older generation can have operational control while placing the ownership of the financial wealth onto the younger generation. This allows them to transfer the capital to their children without facing inheritance tax.

Parents can either reinvest the financial profits or pay dividends to the shareholders (successors). Either way, the financial value of FIC grows over time which helps build generational wealth in the long term.

Other tax benefits include:

  • financial relief on property mortgage interest
  • lower taxes on capital gains
  • no inheritance tax charged on cash transfers to FICs if it exceeds the national financial threshold (£325,000 in the UK)

Of course, there are some downsides to FICs, mostly because it is costly to set them up, and there are possibilities of tax reforms that could influence the financial benefits of the generational wealth. Using properties as assets in the company could result in capital gains tax and stamp duty, reducing the overall wealth. Paying out in dividends will lead to corporation and income tax, which could be higher than the capital's value.

Family Office

A family office is a private entity that manages the financial wealth of a high net worth family and their future generations. They can develop a wealth planning strategy for a single-family or multi-family and focus on their financial success. Multi-family offices serve multiple families as clients and single-family offices only serve one family. The goal of a family office is to grow and pass the financial wealth on to its generations. They handle a number of non-exhaustive tasks, including investments, property matters, day-to-day accounting and payroll, legal matters, succession, public relations and other families issues relevant to their finances. Hence, they need a team of professionals to coordinate their wealth management, starting from actual finances to financial literacy. These entities are different from regular wealth management companies because their capital comes from the family, and they not only look after financial investments but other matters regarding their wealth. They offer a more personalised solution specific to the family for sustaining and growing wealth. Overall, family offices provide crucial services to wealthy families to guide them through the complex world of generational wealth management after accumulating them.

Family offices are beneficial for generational wealth for numerous reasons:

  • Family offices are independent and do not receive incentives from product usage, unlike traditional brokerage firms. This is because of their service delivery based business model, which allows them to prioritise the family's interests and wealth and offer services based on their expertise from an objective perspective
  • Family offices have collective expertise in different areas that contribute to their generational wealth, such as finance, legal, public relations, education and business management, and many others. This allows the family to narrow down the services to one single entity that knows the family's ins and outs and provide them with optimal solutions
  • Family offices are aware of the generational dynamics in a family, which eases the wealth planning amongst the members. This could include helping with succession in a tax-efficient manner, counselling the younger generation of their family's wealth and even helping with communication amongst the family members from the start. This allows them to get creative in resolving any dispute externally and internally

Non-traditional platforms

FICs and Family offices deal with regular investment tools, such as business ownership and investing in well-known assets from traditional and alternative vehicles. Depending on their risk tolerance or how much they can afford to diversify, a family can adopt new or unexplored wealth growth tools to further support their generational wealth. The following are some examples that a family can look into:

  • Digital investment platforms: A family can invest for themselves or their members in digital investment platforms for generational wealth. This could be peer-to-peer lending, digital investment funds, crowdfunding or cryptocurrencies. The benefit of such platforms is that most of these companies offer bonuses for bringing in new members, which a family could take advantage of. Most of these platforms allow investors to tap into money markets indirectly, which would otherwise be inaccessible to the general public due to high capital requirements (e.g. real estate) to reach their financial goals. These platforms are also convenient to use - meaning that there are no strict legal formalities to become their investors other than providing identity documents to be verified. The minimum capital requirement is usually low, and it is affordable for families who are not particularly wealthy. This is not only a good start for families who are just beginning their journey into generational wealth growth but also a vehicle that families can utilise to cushion their financial maintenance in the long term
  • Precious metals: Precious physical metals like gold and silver have been collected for a long time. It is a well-known traditional method for hedging inflation, market crashes, and supplementing generational wealth. Some store these precious metals in the form of bullion. Precious metals have an intrinsic value due to their limited supply - they carry no debts, and they have little to no correlation with other assets. They are very useful in dire times, such as war, and they make sense as a backup investment for maintaining some level of wealth for generations. However, they should not be relied upon alone as they carry the risks of security, storage and price fluctuation. They should be included in the portfolio along with other investments
  • Collectables: These are items that are worth more than their original initial price because of their rarity or popularity. Examples are antiques, art, jewellery, coins, stamps, comics, wine, etc. Many older family members collect and store them during their lifetime, increasing in value as time passes. Younger family members can inherit them and reap their benefit by selling them to private collectors or in auctions for money. The advantage of such investment is that it often requires no initial capital as an older family member may have them from the beginning. However, collectables are not to be held as a standalone investment tool for generational wealth growth, as they can be very risky and not to mention difficult to store. They are meant to supplement other wealth growth and management methods

Summary

When it comes to passing along generational wealth, it's not just about having a lot of it. Money, of course, plays a significant role. It has the potential to widen the divide between the wealthy and the rest of society. Everything from your capacity to receive an education to accessing financial services might be affected by your family's wealth. When families begin thinking about and arranging their budgets, they will be more equipped to achieve their wealth goals. Generational wealth can be achieved, but there are hurdles. Massive wealth creation may be difficult, if not impossible, without large income and debt. Even so, it isn't completely out of the question. If you have debt, pay it off first, then put money aside for an emergency, and then, if you haven't already, work to increase your income. If you're a novice, you may want to seek the advice of a financial professional. You can legally prepare your estate once you've established financial security.

You can use a variety of financial instruments to implement your generational wealth. Family investment businesses, family offices, and non-traditional assets like collectibles and precious metals are some of the tools many wealthy families use.

All families wonder how to secure the financial future for their beneficiaries and leave a legacy for their generation to the next. To generate opportunity for the whole family requires mostly perseverance, such as creating an estate plan, sustaining the family businesses, leaving easy access to all the liquid assets (money, fund, saving accounts) and all the knowledge of financial strategies to be passed down. Regardless, financial education is the most important element to building generational wealth.

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