In a relay race, any runner will tell you that handoffs are the difference between winning and losing. If you can’t move the baton smoothly from one person to the next, you don’t stand a chance—no matter how fast you are!
When it comes to building wealth, you have your own handoff to manage. You need to start thinking about how you’ll pass your wealth to the next generation today. After all, the latest studies show that 10 out of 10 people are going to die someday. No one gets out of this life alive—not even you!
Whether you’re the first person in your family to pass on generational wealth or you’re next in line to inherit it, the steps you take right now can give your family the opportunity to embrace your legacy and build on it long after you’re gone.
What Is Generational Wealth?
Generational wealth includes all the assets—things like investments, real estate, cash and anything else that has financial value—that are passed down from one generation of a family to the next.
But generational wealth isn’t just about the physical stuff. Just as important (and probably even more important) are the things you pass on that you can’t see or touch—like wisdom, values and habits that help shape the character of the generation who will inherit the wealth.
You can’t put a price tag on character—that’s the secret sauce that really helps you and your loved ones handle the responsibility of managing generational wealth so it lasts.
Why Is Generational Wealth Important?
The Bible tells us families are called to manage wealth for God’s glory, and it’s a good thing to pass that wealth down to the next generation. Proverbs 13:22 (NKJV) says, “A good man leaves an inheritance to his children's children.”
But remember, your wealth isn’t the only thing being passed down once you’re gone. The responsibility to manage that wealth is passed down to the next generation too. Unfortunately, we’re not doing a great job of setting up the next generation for that responsibility.
In fact, only one-third of families succeed in maintaining their wealth into the next generation. And get this: 9 out 10 wealthy families lose all their wealth by the third generation.1 That is nuts. This happens for a lot of reasons, but it’s mainly because folks are afraid to actually talk about money and teach their kids how to manage it well. It’s time to break the cycle!
Make no mistake, generational wealth is not about consumption or materialism. It’s not about piling up so much money and stuff that your kids can just sit around and do nothing for the rest of their lives.
When viewed from a proper perspective, generational wealth is about expanding God’s kingdom—it’s about changing your family tree forever and making the world a better place for generations to come. Now that’s something worth getting excited about!
How to Build Generational Wealth
Before you can pass down generational wealth, you first have to build wealth! Remember, building wealth is a marathon, not a sprint. It’s a process that takes time, intentionality and consistency. And there are no shortcuts, people.
Ready to build generational wealth that lasts? Here’s how:
1. Create a Firm Financial Foundation
Before you can really start building wealth, you need to lay a solid foundation to build that wealth on. And that means you need to get out of debt (everything except the house) and save up an emergency fund of 3–6 months of expenses before you start investing for the future.
Market chaos, inflation, your future—work with a pro to navigate this stuff.
Like building a house on a pile of sand, trying to build wealth with debt payments or a lack of savings is a VIP invitation for disaster. When the storms of life come (and they will come), having no debt and an emergency fund in place will keep you from having to start over again and again. Don’t skip this step!
2. Invest 15% of Your Income for Retirement
Here’s where the fun starts! Now that you’ve freed up your greatest wealth-building tool—that’s your income—from debt payments, you can start investing for retirement.
Research has shown that the greatest indicator of retirement success is your savings rate.2 In other words, those who consistently save and invest money every month are more likely to have enough money saved for retirement. What a concept!
Invest 15% of your gross income in good growth stock mutual funds inside tax-advantaged retirement accounts like your 401(k) and Roth IRA. When you do that for 20 to 30 years, you’ll have enough wealth to live comfortably in retirement and pass it on to the next generation.
And it’s always a good idea to work with an investment professional to help you choose the right investments for your retirement portfolio.
3. Pay Off Your House Early
Take a moment to imagine life without a mortgage payment. Sounds amazing, right? After all, the average monthly mortgage payment is more than $1,600.3 Imagine being able to save and invest your entire mortgage payment into your retirement accounts every month or using that money to start investing in real estate.
According to The National Study of Millionaires, the average millionaire pays off their home in 10.2 years. These folks understood that if they wanted to take their investing to another level, getting rid of that mortgage payment was the key! You can use our mortgage payoff calculator to figure out how fast you can pay off your house by making extra payments on your mortgage.
4. Teach Your Kids About Money
Remember that generational wealth isn’t just the money and stuff you leave behind for your kids. It’s also about the knowledge, wisdom and skills you pass down to them too.
You can teach them by talking about money in everyday conversations, sharing where you’ve messed up, and modeling wise behavior with money. When you look back, you’ll find that one of the greatest gifts you could ever give your kids is preparing them to thrive as adults.
And the truth is you can start teaching your kids about money from an early age and show them how to spend, save and give as they grow older. If you want to learn more, Dave and his daughter Rachel Cruze talk about how to make the generational handoff in their best-selling book, Smart Money Smart Kids.
How to Pass on Generational Wealth
Now it’s time to talk about making that smooth handoff to the next generation. Don’t tune out here! We’ve seen too many families neglect this step and end up creating nothing but chaos and confusion. And before long, that generational wealth winds up becoming a curse instead of the blessing it was meant to be.
Here are a few ways to make sure you pass on your generational wealth without a hitch:
1. Write a Will
Everyone over the age of 18 needs a will. And when we say “everyone,” we mean everyone. It doesn’t matter if you’re married or single. It doesn’t matter if you have kids or a bunch of cats running around the house. You need a will.
A will is a legal document that describes exactly how you want your assets (like your house, your investments and other things you own) to be handled after you die.
Wills are state-specific, which means you’ll need to write a new one if you move to a different state. And married couples: If you want to save some time, you can get a mirror will which includes two nearly identical wills that are signed individually by each spouse.
Don’t put this off, people. If you don’t have a will, you can create your own will online with RamseyTrusted provider Mama Bear Legal Forms today! The process can be finished in less than 20 minutes, so what are you waiting for?
2. Set Up an Estate Plan
Estate planning is simply the process of figuring out what will happen to everything you own after you’ve passed away. Writing out a will is part of that, but if your net worth is more than $1 million, then you might need to consult an estate planner to help make sure all your ducks are in a row.
A good estate planner can help folks navigate through more complex estate situations. They can also show you how to minimize your federal estate tax hit so you’re not paying Uncle Sam more than you have to.
3. Put Together a Legacy Drawer
A legacy drawer is a special place where you keep important documents your family will need if something happens to you. What should you put in your legacy drawer? Here are a few things to include:
- Your will and estate plans
- Financial account information
- Funeral instructions
- Insurance policies
- Tax returns
- Account passwords
- A copy of your monthly budget
- Personal letters to loved ones
How Is Generational Wealth Transferred After Death?
In most cases, generational wealth is passed on from one generation to the next through an inheritance. An inheritance can include pretty much anything that’s part of your estate (that’s all the stuff you own that has monetary value), from cash and investments to cars and jewelry.
It’s important to remember that inheritances worth above a certain amount are taxed by the federal government. Anyone with an estate worth more than $12.06 million will have to pay the federal estate tax, which is a tax on the transfer of a person’s property after their death.4
And then there are inheritance taxes, which are imposed on your loved ones after they inherit your stuff. While there’s no federal inheritance tax, six states currently have one on the books. But the good news is that many beneficiaries—including husbands, wives, children and grandchildren—are usually exempt from paying any inheritance taxes.5
With generational wealth and taxes, things can get pretty complicated. That’s why you should always connect with a tax pro you can trust.
Transferring Generational Wealth During Life
While most generational wealth is transferred once the previous generation passes away, you don’t have to wait until death to start the handoff. In fact, there are several ways you can change your family tree and transfer wealth while you’re still alive and kicking.
1. Save for Kids’ Educational Expenses
One of the best ways you can set up the next generation for success is to help them graduate from college debt-free. By saving up a little money each month in an Educational Savings Account (ESA) or 529 plan, you could have thousands of dollars saved up for your children (or even your grandchildren) by the time they graduate from high school. That’s a big deal!
2. Make Financial Gifts
Want to help Junior save up a down payment for his first home? Or maybe you want to cover the cost of Sally’s future wedding? The good news is that families can give up to $16,000 per person—or $32,000 per couple—without having to pay federal gift taxes in 2022.6
So, for example, let’s say you and your spouse have two children. That means you could give the kids up to $64,000 this year—and you can keep doing that every year without getting a tax bill from Uncle Sam.
3. Pass On Your Knowledge
Like we mentioned earlier, generational wealth isn’t just about money. It’s about passing on the knowledge and wisdom that will help them manage that wealth well and pass it on for generations to come.
And there are dozens of ways you can do that right now! You can go through Financial Peace University together with your kids. Set up a monthly coffee date or weekly family Bible study to talk about life and faith. You can hand down some of your favorite books and read through them together. Get creative!
Connect With an Investing Pro Today
Just think about it: You can be the one who changes your family tree forever. That should give you goosebumps! If you want to learn more about how to be a blessing for generations to come, then you need to get connected with an investment pro.
The SmartVestor program can connect you with up to five investment professionals in your area who can help you get intentional about saving. It's never too late to get started!
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