What does it take to leave your children with financial security when you’re gone? To bestow generational wealth that can support them and their children?
Steps like establishing a will and electing for life insurance coverage are crucial parts of that process. (Partnering with an estate planning firm like Trust and Will can help you with the former.)
But there are additional approaches to take in order to enrich that wealth over time and beyond that first generation.
Creating and passing on generational wealth has been out of reach for Black families in particular. This is due to the centuries-long exclusion of Black and brown folks from wealth accumulation and management through racist policies and outright terror tactics.
It’s time for that to change.
What Is Generational Wealth and Why Is It Essential?
Generational wealth can be described as the passing down of assets from parents to your children. (This wealth may include holdings like real estate, investments, or even a business.)
Children who have been set up with these sources of income and potential opportunities for revenue have a significant advantage over those who haven’t.
Access to generational wealth may yield money that could fund a business, pay for student loans, or be put towards buying real-estate properties or a family home. It can also appreciate enough wealth on its own to make its beneficiaries independently wealthy.
However, it’s important to consider that many generations lose wealth over time. In fact, 70% of rich families lose their wealth by the second generation.
This is especially the case for Black families. A 2015 Atlantic article called “How Black Middle-Class Kids Become Poor Adults” revealed that wealth attainment typically stays in one generation for Black families.
“When Black families attain middle-class status, the likelihood that their children will remain there, or do better, isn’t high,” the author wrote.
“Many Black Americans not only fail to move up,” she continues, “but show an increased likelihood of backsliding.”
How Do Wealthy Black Families Build Generational Wealth?
So, how can you create wealth that lasts for generations to come? It’s all about being informed and creating multiple streams of revenue.
1. Talk to your children about wealth.
One not so obvious step to building generational wealth is to discuss money with your children. It’s important to make sure that your children are financially empowered so that they’re able to make smart decisions about their own money.
Your children will need to understand how to responsibly manage the inheritance you worked so hard to set up for them. So step one is ensuring they’re equipped to do so. (Afterall, if you don’t know better, you can’t do better.)
Teach them about savings, investments, and money management. If you’re not confident in your financial education, don’t let that keep you from talking to your kids about money. There are a number of resources out there that can teach children those important money lessons, like World of Money, Flocabulary, and FamZoo, while you’re learning as well.
2. Buy a home or invest in real estate to create generational wealth.
Investing in real estate can yield a significant increase in assets. Moreover, you may have heard just how hot the market is right now and how mortgage rates are the lowest they’ve been in decades.
We’ve seen a boom unlike any other and sellers are cashing out on some of the biggest real-estate payouts in decades. My wife and I decided to sell our home because of the market boom. In turn, we were able to make a substantial profit on our home in just three years, allowing us to reinvest in a larger property.
We consider this an investment for our child and children to come. As we pay off this newer property over the years, we’ll be able to hand it over for them to do with it what they wish. They could potentially decide to live there or sell it and split the profits. Either way, this property acts as a financial interest in their future and their children’s future.
Conversely, you can purchase a property and rent it out to tenants. While the property appreciates in value, you’re either making money from your tenants or having them pay the monthly mortgage on that property, acting as an eventual stream of passive income.
Additionally, when it comes to managing properties, there are several tax advantages and deductions that you’d be able to write off as part of your business expenses.
3. Start a business.
Building a business to pass down to your children, grandchildren, and beyond is another way to create generational wealth. (Nearly 90% of businesses in the United States are owned by families, so this concept of “keeping it in the family” is nothing new.)
Starting a family business doesn’t guarantee the type of success that can sustain a family for generations. But if you’re able to establish a successful one, it can serve your family well. Not only can you choose something you’re passionate about to invest your time into, but you’ll also be educating your children about entrepreneurship and your industry.
When developing a family business, make sure you have a solid transition plan and that you educate your children about the business as they grow. While 70% of family-owned business proprietors say they want to transfer their business to their kids, only 30% actually make it to the second generation, according to Family Business Alliance.
4. Invest in stocks.
Another great way to build generational wealth is to invest in the stock market. By not investing, Black people have “missed out on the roughly 260% returns for S&P 500 funds over the last decade and the resulting chance to see their wealth grow,” ABC News reports.
Investing may feel intimidating, but the process can be easy if you take just a small amount of time to learn how to get your feet wet.
One easy and low-cost way to dip your toe into investing is through index funds.
Index funds are an easy, hands-off way to invest in diversified stock. Diversified funds offer a low-risk option to investing because your investments are spread out among multiple stocks and therefore, lowers your risk of concentrated losses. Not to mention, index funds typically yield higher investment returns than their counterparts.
In most cases, your stock options can easily be transferred to your selected beneficiaries. That said, you should always make sure this is the case before investing by including stock options in an estate plan for your children.
5. Establish an estate plan.
If you’ve amassed assets, but have no plan for how they’ll be passed on, do you truly have generational wealth?
Estate planning is a simple, affordable, and flexible way to ensure you’re building generational wealth for your family. If you want, you can have a portion of your estate designated for a future generation beyond just your children.
Your estate—that is, the accumulation of your possessions, properties, land, cash, and investments—should have a clear path forward in the event of your absence. With estate planning, you establish a legal and financial plan for how your wealth will be distributed.
When it comes to estate planning, you’re in the driver’s seat. You’re deciding, in the clearest terms, who will inherit your wealth and how that wealth will be distributed. Using a trusted service like Trust & Will to set up an individualized estate plan helps streamline the process for you and your family.
By knowing how your estate will be distributed in advance, you’ll avoid the legal fees that come when a court has to step in and make those decisions. (And the family drama—see Prince, whose estate still hasn’t been settled since his death in 2016.)
It’s time for Black families to gain access to the financial well-being they’ve been shut out from for so long.
And while yes, we as a community can’t estate plan our ways to affluence (that’ll require our continued lobbying for significant policy changes to help close wealth gaps), the advice above are good steps for the things we do have control over.
Do you have additional questions about building generational wealth? Need more guidance in planning your estate? You can connect with someone from Trust & Will here—use the offer code MATERMEA to get 10% off any estate plan at checkout.