How to Build Generational Wealth: 7 Classic Wealth-Building Strategies
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We tend to think of generational wealth as “old money” some people are lucky enough to inherit.
In reality, the potential to leave a financial legacy exists for anyone who generates more income than they spend.
If you have a high-income career, like many of the athletes and entrepreneurs we work with, you have an opportunity to change the course of your family’s future.
However, making a lot of money does not guarantee that your kids will be set for life.
If you want financial independence for yourself, your children, and their children – you need to start thinking strategically long before retirement.
Our clients know there’s no such thing as overnight success. Their stories begin long before draft day, and include massive effort, years of focus, and exceptional dedication.
Building a financial legacy is no different. Long-term wealth requires long-term effort and a strategic plan.
In this article, we’ll share some ways to leverage income into generational wealth, and some of the best strategies to secure it for future generations.
What Is Generational Wealth?
Generational wealth is family wealth, passed down from one generation to the next, repeatedly.
Here’s how it works:
A set of parents produce valuable assets, then pass them down to their children. The children then grow those assets, then pass them down to their children.
Each generation has the opportunity to build on inherited money, property, and businesses. As this pattern continues, the family’s wealth tends to expand.
Think of it like this:
The first generation plants a seed, then nourishes it so it can grow into a tree. The branches extend, offering apples.
The second generation decides to sell some of the family apples for profit. With that money, they plant more seeds, which grow into trees that supply more apples.
The third generation nourishes the family’s trees, but now they’re flooded with apples, which they convert to cash. With this cash, they buy dozens of high-yield trees.
The orchard expands, becomes an increasingly valuable asset, and produces more cash every season. That’s more profit for the fourth generation to manage and invest.
But it all started from that one seed the first generation planted.
It became a family dynasty because each generation took steps to protect and grow the assets they inherited.
7 Ways to Build Generational Wealth
Regardless of what’s driving you, whether it’s securing your family’s future or building an empire – there are some tried and true strategies for building generational wealth.
Some of these strategies involve investing in assets that will grow over time and produce future income. Others reduce the risk of wealth erosion due to taxes, unforeseen circumstances, and intergenerational wealth transfer.
Finally, we’ll include some important steps to ensure future generations are equipped to carry on your legacy – and make the most of the advantages you’ve worked hard to offer.
1. Start a Business You Can Pass Down
A business is an asset you can transfer to your children. If you decide to start one, make sure you offer a product or service people will always want.
Take the same approach as Warren Buffett when he invested in Coca-Cola. Buffett chose Coca-Cola because of its long history of being an American staple. He felt confident that people will still want a Coke 100 years from now.
Likewise, you want to build a business that pulls in customers 100 years from now.
For example, if you decide to start a business where you sell winter coats. You can be confident that as long as people live in chilly areas, that business can still be profitable long after you’re gone.
A great example of a family-owned business is The LEGO Group. Yup, LEGO!
Founded in 1932, the Kirk Kristiansen family still owns The LEGO Group. Members of the Kirk Kristiansen family have passed down their business for four generations and counting.
How were they able to make each generational wealth transfer a smooth process? Is there a pattern you can follow?
Harvard Business Review has an idea about how to make the transition process easier:
“Transition is a process, not an event — and the more the continuity plan resembles a discussion rather than an ultimatum, the greater the chances of success. The plan can’t simply be dictated from one generation to the next; incoming leaders need to be prepared and aligned.”
2. Develop Multiple Revenue Streams
Employment income is one money source, but you may need to pull from multiple to create generational wealth.
That’s why it helps to develop multiple revenue streams. The goal is to generate as much passive income as possible, which doesn’t require much active labor.
You could own a globally diversified portfolio of stocks and bonds that yield dividends or pay interest. That’s a revenue stream.
You could own real estate that is professionally managed to generate returns through appreciation or cash flow — that's another revenue stream.
When you’re ready, some private investments like venture capital have the potential to produce massive future cash flow. All of these should be discussed with a qualified wealth advisor after assessing your comprehensive situation.
In short, the more revenue streams you have, the larger your pool of wealth. Which means more money you can pass down to your family.
Keep in mind:
One revenue stream can lead to another. As a professional athlete, you’ll make your first paycheck actively, getting paid to play your chosen sport. This leads to off-the-field marketing income as you leverage your social capital and name recognition.
By leveraging financial capital into income-generating investments, as we discuss below, your net worth continues to grow long after you retire.
3. Invest Wisely (and with Professional Help)
With so many investing options out there, you may not know where to start.
Leaving your money in a bank account exposes it to inflation. The problem with inflation is that it chips away at your money’s value. The inflation rate is far higher than the interest most banks provide on your money, and that’s no way to create generational wealth.
Instead, you could put that money to work by investing it in the investment vehicles that historically beat inflation like stocks, bonds, or private equity. These assets grow your net worth and add to your passive income every year.
Of course, most people don’t have the time to watch the markets and analyze stocks. And the structure of your investment portfolio has major implications for your tax bill – another source of wealth erosion.
If you’re on a quest to build a legacy, it’s essential that you consider every investment as part of a greater strategy. You need a financial structure that considers your family situation, legal questions, and tax planning – not an investment portfolio in isolation.
There are more than 300,000 financial advisors in the US, but most of them serve average investors and are not qualified to advise on taxes, structuring your assets, or family law.
Instead, wealthy families work with independent family office wealth management firms to handle their investments and coordinate the entire wealth strategy.
Learn more about what family offices do and when to consider working with one as you grow your net worth.
4. Purchase Real Estate
Certain types of real estate have historically been attractive for generating returns and continue to be so.
Since real estate generally appreciates, except in extremely unfavorable market conditions, it’s an excellent way of growing wealth across time.
However, there are many ways to invest in real estate, starting with the home you live in. If you own a house, you are already investing a portion of your net worth in real estate. It’s an investment your family can inherit, but it’s also a lifestyle expense – not an income-producing asset.
As your income and net worth grow, don’t make the mistake of buying more homes than you need. There are vastly more efficient ways to invest in real estate, and some involve more labor and steeper learning curves than others.
“Doing it on your own is usually a mistake. Unless you like to be a landlord, unless you like dealing with tenants, especially multifamily, evicting people, just understand what you’re signing up for when it comes to real estate. There are better ways to get returns than becoming a real estate mogul and trying to do everything yourself, especially once you have some wealth.”
Different types of real estate investing come with different tax advantages, liquidity challenges, and cash flows. Before investing in a deal, make sure you understand all these factors and it works in the context of your long-term strategy.
Our clients have access to a Chartered Financial Analyst who can vet deals, and look at the opportunity, the risks, and the track record of any private real estate firms involved.
5. Protect Wealth with Life Insurance
Life insurance is not a traditional investment but serves an essential purpose in protecting a family’s wealth for the younger generation.
Life insurance provides a safety net for your children and dependents in the event of unexpected (or expected) death. When you reach higher levels of wealth, strategic use of life insurance can help with the efficient transfer of your estate.
There are different types of life insurance policies, with the most cost-effective being a term policy. At various milestones in building your net worth, other types of policies might become necessary as part of your estate plan.
With the right structure, you can implement insurance strategies that lessen the burden of estate taxes and other debts and expenses and provide significant tax and death benefits.
There are also expensive forms of life insurance that are sold inappropriately and often misunderstood. It can be a treacherous landscape and you should seek a team of Certified Financial Planners, not insurance salespeople, to help you navigate the right solutions for your personal situation.
It’s important to work with a financial team who understands the complexities of life insurance policies. Insurance should always be considered in the context of your situation and financial vision.
6. Set Up a Trust
Once you’ve built substantial assets, the question becomes how to make sure your family’s wealth is protected. That means efficiently transferring assets to the next generation, while keeping them safe from unnecessary taxes, excessive spending, and potential fraud.
A trust is a way you can dictate how your family receives your assets. You can set up a trustee who carries out your wishes, whether or not you’re still alive.
With a trust, you can also avoid probate.
The result?
Your family has access to more of your money, making it easier for them to continue building wealth. And they’ll be able to receive your assets faster without the probate process.
Another benefit of a trust is that you can avoid public records and protect your family’s privacy.
Furthermore, a trust can provide nice tax benefits. If your trust meets certain conditions, it can shield your assets (along with their appreciation) from estate tax after you part. That means more money for your family, giving them more of a nest egg to work with during their lifetime.
Finally, trusts allow you to set specific terms on how you want money to be managed and distributed. For instance, your trust may say that each grandchild will receive money to cover a college education, along with a lump sum when they turn 25.
These safeguards keep wealth secure for its intended recipients. Rather than inheriting money that they aren’t equipped to manage, beneficiaries of a trust can have a professionally managed fund with regular distributions.
In short, proper estate planning allows you to be in the driver’s seat, even when you’re no longer physically steering the wheels.
7. Take Advantage of Legacy Wealth Planning
Warren Buffett once said:
“The chains of habit are too light to be felt until they are too heavy to be broken.”
Generational wealth means more than just making a lot of money. You need an integrated wealth plan that includes investment advice, tax planning, risk management, and legacy planning.
Not only for yourself but for the members of your family who will benefit from your legacy.
This isn’t generalized financial advice.
The world’s wealthiest families create legacy plans that consider all business interests, investments, and assets together – and how each family member will participate, now and in the future.
Legacy planning is more than simply creating a will. It might include strategic use of life insurance, ownership structures, and trusts to transfer assets in the best way possible.
But just as important is ensuring continuity of wealth management and business interests, so the strategies in place will continue to work across generations.
As a multi-family office, that’s part of what we do. We involve and educate the next generation, so they’re equipped to build on the legacies our clients create.
Generational Wealth Management
Your time on earth is finite. But your legacy can live on — forever.
When you learn how to build generational wealth, you can create assets that outlive you and your grandchildren. It’s about multiplying wealth, and it’s the ultimate gift for your family.
Today, we covered seven effective wealth-building strategies. But that’s just the beginning!
Contact us if you need a customized strategy to leverage your human capital into generational wealth for the people and causes you care about the most.
