Here’s How You Can Maintain And Transfer Generational Wealth

You’ve worked hard to build wealth. The challenge is maintaining it and passing it down to the next generations. It’s about setting up your family for long-term financial security through smart investments, well-planned savings, and proper asset management. This article explores strategies for maintaining and transferring your wealth, including a variety of investment vehicles, estate planning, and financial literacy principles to ensure the next generation is ready to preserve and grow your family’s legacy.

What Is Generational Wealth?

Generational wealth refers to financial assets passed down from one generation to the next. These assets can include property, investments, savings, and businesses. The key to maintaining and transferring this wealth is strategic planning, which goes beyond leaving a will. It involves active decision-making, wise investment choices, and tax-efficient structures that can maximize wealth transfer while reducing potential financial burdens for heirs.

“Millennials are the first generation to be worse off than our parents’ generation. I think a lot of us are looking to keep our children from the same financial hardships we had to go through,” shares Philip Barrar, founder and CEO of FutureMoney.

Many people make the mistake of waiting until later in life to think about generational wealth, but the most successful wealth transfer plans are often those that start early. This gives time for investments to grow, allows wealth to compound, and ensures that your heirs have the financial education necessary to maintain that wealth.

Key Investment Vehicles For Generational Wealth

A solid generational wealth plan often begins with choosing the right investment vehicles. These vehicles are tools that help grow, preserve, and eventually pass on wealth in a structured, tax-advantaged manner. Explored below are several key options, each offering unique benefits for building and transferring wealth.

Custodial Accounts

Custodial accounts , such as UGMA (Uniform Gift to Minors Act) and UTMA (Uniform Transfers to Minors Act), are excellent tools for starting to build wealth for the next generation. These accounts allow you to transfer assets to minors while a custodian manages the account until the child reaches adulthood.

The accounts are flexible and can hold a variety of assets, including cash, stocks, and bonds. One of the main advantages is the tax benefit; the earnings are taxed at the child’s lower tax rate, which can result in significant savings. Additionally, there are no contribution limits, which provides flexibility in how much can be saved.

However, once the child reaches the age of majority (18 or 21, depending on the state), the assets are transferred to their full control, which could be a drawback if the child is not ready to manage significant financial resources. Moreover, assets in these accounts are considered part of the child’s financial profile when applying for financial aid for college, which may reduce eligibility.

529 College Savings Plans

These tax-advantaged savings plans are designed for educational expenses, allowing for tax-free growth and withdrawals for qualified education costs such as tuition, books, and room and board. Each state offers its own version of the 529 plan , with some states providing additional tax incentives, such as deductions or credits for contributions.

The primary advantage of 529 plans is their high contribution limits, allowing significant amounts to be saved for education over time. In 2024, for example, contributions up to $18,000 per year can be made without incurring gift taxes, with an option to front-load up to five years of contributions.

This makes 529 plans an attractive option if you want to ensure your children or grandchildren are financially prepared for the rising costs of higher education. On the downside, withdrawals will be subject to income tax and a 10% penalty on the earnings if the funds are not used for educational purposes.

Regular Investment Accounts

Unlike tax-advantaged accounts such as IRAs or 529 plans, regular investment accounts have no contribution limits or restrictions on how the funds can be used. This makes them ideal if you think you may need access to your investments, such as buying a home, funding a business , or providing for future expenses.

Barrar says building wealth through regular investment accounts is easier: “Traditionally, building generational wealth was only available to high- and ultra-high-net-worth individuals, using things like trusts and complex tax strategies. But now, fintech apps like FutureMoney let you take advantage of auto-debiting into an investment account in three to five minutes.”

Regular investment accounts allow you to buy and sell a wide range of assets, including stocks, bonds, and ETFs. While they do not offer the same tax advantages as retirement accounts, they are highly flexible and can be structured as part of your estate plan. The downside to regular accounts is that they are subject to capital gains taxes on profits and taxes on dividends or interest income, making them less tax-efficient than other vehicles.

Individual Retirement Accounts

IRAs can also be an excellent tool for building generational wealth if set up for children or grandchildren. If the child has earned income, a custodial IRA can be established on their behalf, and contributions up to the IRS limit ($7,000 for 2024) can be made.

Roth IRAs are particularly advantageous for minors because contributions are made with after-tax dollars. This offers decades of tax-free growth, which can lead to substantial savings by the time the child reaches retirement age.

One key benefit of setting up a Roth IRA for a minor is the ability to harness the power of compounding over a long period. Starting an IRA early gives the child the chance to see their money grow over many decades, resulting in a potentially large retirement fund.

Contributions, but not earnings, can also be withdrawn penalty-free for significant life events, such as education or a first home purchase. However, a significant limitation is that IRAs require the child to have earned income, which can make it difficult to establish one for very young children. Nonetheless, for teens or young adults who are working, setting up a Roth IRA is a powerful way to start building generational wealth early in life.

Life Insurance

Life insurance, particularly whole life insurance, is often overlooked as a generational wealth-building tool but can provide both long-term protection and financial benefits. Purchasing a life insurance policy for a child or grandchild offers two major advantages: a guaranteed death benefit and a cash value component that grows over time.

The cost of purchasing life insurance for a child is generally very low, making it an affordable way to provide financial security. Over time, the policy’s cash value grows, offering a steady and reliable financial resource that can be leveraged at any point during the child’s life.

While the cash value grows more slowly compared to other investments, the policy can be transferred to the child when they reach adulthood, giving them control over both the death benefit and the accumulated cash value. Though the returns on whole life policies are modest compared to other investment vehicles, life insurance offers the added benefit of financial protection, making it a worthwhile consideration for long-term generational planning.

Real Estate

Purchasing real estate directly for your heirs provides them with a valuable asset that can generate income and appreciate over time. You can buy the property outright or place it in a trust to be transferred when the child reaches adulthood.

Real estate offers significant benefits in terms of long-term wealth accumulation. For instance, in addition to the property’s potential for appreciation, rental properties provide a steady stream of passive income, which can help support the child throughout their life.

However, real estate is also a highly illiquid asset, meaning it may not be as easily accessible in times of financial need compared to more liquid investments like stocks or bonds. Additionally, properties require ongoing maintenance and management, which can be a burden for younger individuals unless they have sufficient support in place.

Estate Planning

Beyond selecting the right investment vehicles, a comprehensive generational wealth strategy should include estate planning. Trusts and other legal structures allow for controlled distribution of assets, protecting you from creditors and taxes while ensuring your heirs use the wealth responsibly.

For example, trusts provide a legal framework for passing down assets while maintaining control over how and when those assets are distributed. For example, a trust can specify that funds only be used for education or living expenses, ensuring that the inheritance is not squandered.

Trusts can also protect assets from creditors, ensuring that wealth is preserved for future generations. They offer flexibility in asset distribution, allowing for gradual disbursement rather than a lump sum, which can help ensure that heirs are not overwhelmed by sudden wealth.

By combining custodial accounts, 529 plans, investment accounts, and retirement accounts with a trust, you can ensure that all assets are passed down efficiently. Trusts can also help mitigate estate taxes. A well-structured trust minimizes tax exposure while allowing assets to grow over time.

The Importance Of Financial Literacy

Financial literacy is a critical component of maintaining generational wealth, as uneducated heirs may squander their inheritance due to poor financial decisions.

Building Good Financial Habits Early

You can teach children the value of saving and the benefits of compounding. You can help them manage allowances or part-time job earnings, and discuss financial decisions openly. This prepares them for the day they take control of their inherited wealth.

The most critical element is starting early and maximizing compounding. For example, according to Barrar, setting up a $15 weekly savings for a child from birth to age 65 will yield more than $3 million at a 10% rate of return, compared to just over $200,000 if it’s started at age 30.

Managing Investments

Another critical component of financial literacy is teaching the next generation how to manage investments effectively. Understanding the basic principles of investing—such as diversification, risk tolerance, and asset allocation—is key to preserving and growing wealth over time.

It’s essential to explain how market fluctuations work and the importance of maintaining a long-term perspective rather than reacting emotionally to short-term market volatility.

Additionally, younger family members should be encouraged to track and monitor investments regularly. “As portfolios become more complex, you need to have a system to track and manage everything,” shares Cory Shea, founding partner at Clockwork, a platform that caters to HNWIs and UHNWIs.

“In our experience working with clients, especially in estate planning-related efforts, it’s not uncommon for an investment or account to be missed, forgotten, or misvalued,” Shea explains.

Family Governance And Legacy Planning

Establishing family governance and a long-term financial plan ensures that future generations stay aligned with the original intent of wealth transfer. Regular family meetings, involvement in charitable giving, and creating a family financial mission can create a sense of stewardship.

“Of course, younger generations will often have different interests than their parents or grandparents,” reminds Shea. He says heirs can be less conservative with their investment preferences, which can jeopardize what you’ve built. Shea suggests establishing an Investment Policy Statement to help ensure alignment and rules to guide operation and investment decisions.

“It’s important to be as proactive as possible and limit reactivity to the next shiny thing,” Shea warns. By fostering a culture of responsibility and financial literacy, you can ensure that wealth is maintained across multiple generations.

Final Thoughts

Maintaining and transferring generational wealth requires strategic planning, diverse investment vehicles, and financial education. From custodial accounts and 529 plans to real estate and IRAs, each tool plays a unique role in growing and preserving wealth. Estate planning, diversification, and financial literacy are equally important in ensuring that the next generation is equipped to build upon the foundation laid for them.

By True Tamplin, Contributor