The Great Generational Wealth Transfer is happening now. Between 2016 and 2026, Canadians can expect to see the largest intergenerational transfer of wealth in history. Approximately $1 trillion in personal wealth will be transferred from one generation to the next (from The Silent Generation and Baby Boomers to Generation X and Millennials, to be exact).
But what does this mean? How can you ensure your family is taken care of for generations to come? And how does generational wealth fit into the rest of your estate and retirement planning?
We’ll cover these questions and more in this in-depth look into generational wealth.
What is generational wealth?
Generational wealth—sometimes referred to as legacy wealth or family wealth—is financial assets that are passed down from one generation to the next. For example, from you, to your children, to their children, and so on. Generational wealth can include real estate property, money, investments, stocks, bonds, family businesses, or anything that has a monetary value.
What is generational wealth transfer?
The term general wealth transfer simply refers to the act of transferring generational wealth (i.e. money, property, etc.) to your children or grandchildren. With proper generational wealth planning and management, wealth can be passed down for many generations within your family.
Why is generational wealth important?
Generational wealth is important because it can offer a significant financial advantage to your family. For example, if your children or grandchildren received a financial advantage early on in their life, this could help them pay for their university or college education alleviating the need for student loan debt, or be used for a down payment on a home. This creates a significant advantage to young adults starting their life in the real world.
Having a will in place ensures that your generational wealth is distributed and handled the way you intended. Online wills are the easiest way to do so. Start today →
How much money is considered generational wealth?
For any amount of wealth to be considered generational wealth, it simply has to be passed down by at least one generation; however, there is no definitive number that constitutes generational wealth because wealth is relative. The amount of passed-down family wealth all depends on the recipients and how it is used.
For example, if you received $1 million dollars in generational wealth but only need $250,000 to live comfortably for the remainder of your life, the million would be more than enough to be considered generational wealth and could continue to be passed down to your future generations. On the other hand, if you inherited $1 million dollars but spent it all within your lifetime, the money would not go further than one generation.
During a poll conducted by IPC Private Wealth of Investment Planning Counsel, one in five affluent Canadians said they fear their children will not have anything to pass down to their own children. Reasons for their concern include high cost of living, lack of financial knowledge, splurge spending, and losing their inheritance due to divorce.
Building generational wealth that can be passed down from generation to generation requires a large amount of wealth, strategic financial and estate planning, as well as financially responsible spending by those who inherit it.
Finding a reputable financial advisor is usually important when handling your estate. Find out exactly when having a financial advisor is important for estate planning. →
Creating generational wealth: How does it accumulate?
You can accumulate generational wealth acquiring assets, investing in assets that produce wealth, or simply by saving money that you don't intend to spend during your retirement, with the intention of passing it down to your future generations.
There are many ways to build generational wealth. Here are some of the top methods:
How to build generational wealth
The following are simple strategies you can use to start building generational wealth for your family and loved ones.
- Save money
- Invest in real estate
- Invest in the stock market
- Start a family business
- Take out life insurance
1. Save money
Saving money is one of the simplest ways to generate wealth. By moving money into a savings account and setting it aside for the next generation, the money will be designated for that purpose and carried out with that intention.
Be mindful, however, that putting money away into a savings account does not guarantee the greatest return. Inflation will always play a role in determining generational wealth as well; the value of $1 today will not be the same value in five years. That’s why it is important to always ensure your savings are generating high interest to secure your family’s financial future.
2. Invest in real estate
Investing in real estate is a common way to create generational wealth. This can include a single investment property or multiple investment properties. Your real estate portfolio can be used to build your estate plan when deciding how to distribute your wealth to future generations. And although real estate values can fluctuate from time to time due to the market, it is still one of the best methods to build and maintain generational wealth.
3. Invest in the stock market
Stock market investments such as index funds are a fanatics way to generate passive income to protect long-term wealth from inflation. A mutual fund or exchange-traded fund (ETF) are perfect examples of investment funds within the stock market that can build generational wealth that can be passed down to your family members.
4. Start a family business
The securities or ownership of a family business can be included in generational wealth. Where there is a successful business to pass down there are often financial and career advantages. Family businesses offer a means of ongoing income, revenue, and money as well as career opportunities that would not otherwise be available to someone outside of the family.
5. Take out life insurance
Life insurance can help you pass down wealth for your family and maximize the amount of wealth that is passed down. There are several tax advantages to having life insurance since no estate taxes are owed on life insurance and life insurance policies are not counted as part of an estate and therefore are not taxed by the federal government.
The benefits of life insurance are that there is more money to pass down to your heirs and it minimizes your estate taxes. Life insurance can also help provide financial support for dependents in the event of an untimely death.
End-of-life discussions with your family are important. Get the Guide To Discussing End-Of-Life Wishes With Family →
How does generational wealth fit into estate planning?
Did you know that 58% of affluent Canadians have not discussed instructions for their estate with their heirs? In order to distribute any accumulated generational wealth, this will need to be clearly determined as part of your estate planning. To pass down generational wealth, you will need a legal will, a trust, and named beneficiaries.
Of the many reasons you should have a will, having full control over the wealth you leave your family for generations to come is one of the most important. According to PolicyMe's 2022 Canadians and Money Survey, 11% of Canadians made or updated their will/end of life plans in 2021. While finalizing the details of your last will and testament, a trust fund (or trust funds) should be set up as part of your estate planning. Assets placed within a trust avoid probate and certain taxes, further maximizing the wealth passed down to the named beneficiaries within your family.
Take full control over your generational wealth
Once you have generated enough wealth to secure your family’s financial future, it is imperative that you include the details of this wealth within a last will and testament to ensure it is properly handled and distributed. Creating a legal will has never been easier and can even be done online.
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Given the depth and specifics of the article provided, I can confidently address each concept related to generational wealth, drawing from a combination of financial expertise, knowledge of estate planning, and broader economic principles.
Generational Wealth: Generational wealth, often termed legacy or family wealth, refers to assets and financial resources passed down from one generation to another. This wealth isn't just limited to monetary assets; it encompasses tangible assets like real estate, family businesses, stocks, bonds, and other forms of investments. The primary objective behind generational wealth is to provide future generations with a financial foundation, which can subsequently offer them opportunities and advantages, such as education, homeownership, and business ventures.
Generational Wealth Transfer: The act of transferring generational wealth involves strategic planning to ensure that assets transition seamlessly from one generation to the next. Effective generational wealth transfer involves tools like wills, trusts, and other estate planning mechanisms. The process aims to minimize tax implications, avoid probate, and ensure that the wealth serves its intended purpose for future generations.
Importance of Generational Wealth: Generational wealth plays a pivotal role in leveling the playing field for subsequent generations. It can break the cycle of poverty, provide educational opportunities, and offer financial security. Given the rising costs of education and living, a solid foundation of generational wealth can offer significant advantages, ensuring that beneficiaries have resources to pursue their aspirations without being burdened by debt or financial constraints.
Determining Generational Wealth: While there isn't a fixed monetary threshold defining generational wealth, the essence lies in its longevity and ability to benefit multiple generations. The value and impact of generational wealth depend on prudent management, investment decisions, and financial responsibility by beneficiaries. As highlighted, the fear among some affluent Canadians underscores the importance of instilling financial literacy and responsible financial stewardship among heirs.
Building Generational Wealth: Several strategies facilitate the accumulation and preservation of generational wealth:
- Saving Money: While savings provide a foundational approach, it's essential to account for inflation and seek avenues offering better returns than traditional savings accounts.
- Real Estate Investment: Real estate has historically been a cornerstone of generational wealth, offering appreciation, rental income, and tax advantages.
- Stock Market Investments: Diversified investments in stocks, mutual funds, and ETFs can generate passive income, protect against inflation, and facilitate wealth accumulation.
- Family Business: Establishing and nurturing a family business can provide ongoing revenue streams, employment opportunities, and serve as a tangible legacy.
- Life Insurance: Beyond providing financial security, life insurance offers tax benefits, ensuring that beneficiaries receive the intended wealth without undue tax implications.
Estate Planning & Generational Wealth: Estate planning serves as the linchpin for effective generational wealth transfer. Tools like wills, trusts, and designated beneficiaries streamline the process, ensuring that assets transition according to the benefactor's wishes. By addressing end-of-life wishes, tax implications, and potential disputes, estate planning safeguards the integrity and purpose of generational wealth.
In conclusion, the article underscores the significance of generational wealth in shaping future opportunities, mitigating financial challenges, and preserving family legacies. By adopting strategic financial planning, prudent investments, and comprehensive estate planning, individuals can ensure that their hard-earned assets serve their intended purpose for generations to come.
