Everything you Need to Know About Generational Wealth

We all worry about the children in our lives and what their future will be like. 

It doesn’t matter how old you are or how much money you’ve got in the bank. Adults will always lose sleep thinking about how the kids they love are going to stay afloat when they’re gone.

The good news is that it’s possible to help your loved ones start out on the right foot through generational wealth. 

For those with access to a wide range of assets, it’s simply a matter of preparing children to gain control over those finances and putting the right mechanisms in place to ensure a safe and sensible transfer of wealth. 

And for those wanting to build wealth for families, there are plenty of tools and investment vehicles available to make the process of accumulating wealth faster and more efficient.

This guide explains what generational wealth is, strategies to build generational wealth, and how you can use a custodial account to build generational wealth.

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What is Generational Wealth?

Before diving into precisely how you can build generational wealth, it’s worth pumping the brakes to talk about what generational wealth actually means.

Generational wealth can refer to any kind of asset that a family passes down to children or grandchildren. That wealth can come in many forms — including cash, stock shares, bonds, investment funds, properties, or even shares in a family company.

Why do families pass that sort of wealth down? Simply put, generational wealth is all about empowering the next generation of your family with financial freedom.

If you’re starting from scratch financially or you’ve got a large debt burden right out of college, you’ll definitely understand the importance of generational wealth first-hand.

Think about it: if a child’s parents or loved ones are able to do something like fund their college education, it can make a world of difference to their financial future. Instead of spending decades repaying huge student loans, they can focus on saving money to buy their first home, take a trip around the world, build start-up funds for a new business, save for their future retirement, or anything in between.

That’s what generational wealth is all about. By amassing wealth that you can pass down to the children in your life, you’ll not only be able to share your success with them — but you can also help them start off on the right foot financially.

On the other end of the spectrum, maybe you have already accumulated wealth. Now you’re probably finding yourself considering passing that wealth down to the next generation. If this sounds like you, you’re definitely not alone.

More adults are beginning to think about the financial legacies they’re leaving for children, and studies say we’re going to start seeing a lot more transfer of wealth in the coming years.

At present, it goes without saying that there’s a massive generational wealth gap. In fact, the average baby boomer currently holds 10 times more wealth than a millennial.

But as family patriarchs and matriarchs begin to move into the next phase of their lives, millennials are expecting to inherit a whopping $68 trillion by 2030.

According to one wealth management survey, passing on that wealth doesn’t come without its own challenges. An estimated 44% of high-worth individuals in the U.S. are concerned that their children are going to lose their family wealth. 

That’s why it’s absolutely critical that families teach children financial literacy and put the right mechanisms in place before passing on their accumulated wealth.

How Do You Build Generational Wealth?

You may already have assets that you’d like to pass on to the next generation of your family — but plenty of us have to start from scratch.

Fortunately, there are plenty of strategies available that you can use to acquire assets and save money. The investment strategies you ultimately go for will depend on your lifestyle, investment style, timeline, the age of the children in your life, and more.

To help you get started, we’ll break down some of the most popular investment strategies families use to accumulate or grow existing generational wealth.

Invest in the stock market

If you want to make your wealth work harder and save more to pass onto multiple generations, one of the most popular options is to invest in the stock market.

According to global investment giant Goldman Sachs, 10-year stock market returns have averaged 9.2% over the course of the last 140 years. This data comes from the Standard and Poor's 500 (S&P 500), which is one of the stock market’s most critical indices.

Translation: if you invest in an index or securities that suit your investment style, you statistically stand to generate some pretty respectable returns over time. That’s why it’s worth exploring various mutual funds, stocks, or exchange-traded funds (ETFs) now.

Invest in real estate

Real estate has always been viewed as a great way to grow your family’s wealth over time. Generally speaking, the real estate market can fluctuate pretty dramatically — and we all know that old adage about “location, location.”

Even so, according to the S&P 500, real estate still offers solid returns over time as an investment.

As of May 2021, the average return on a one-year U.S. real estate investment was 31.13%. Over 10 years, you’re looking at a slightly less impressive return of 6.6%.

To many, that’s still going to seem like a pretty safe way to build wealth through assets. What’s more, real estate investments also go hand-in-hand with a few tax benefits. Real estate investors can deduct a range of expenses on their tax returns to the Internal Revenue Service (IRS).

Start saving

If you’ve got cash in the bank, one of the best options to start accumulating generational wealth is to save what you can.

According to the Bureau of Economic Analysis, the U.S. personal saving rate has experienced a surge in 2021. This is the percentage of your income that’s left after you pay taxes and spend all the money you’ve got to. 

In March 2021, that saving rate hit 27.6% — meaning that now is probably the best time to look at your personal financial situation and start saving for the future. The key is to make sure that you’re using a saving mechanism that suits your goals and the amount you’re able to save.

Teach financial literacy

Financial literacy is the knowledge that people need to make important financial decisions. It includes a wide range of skills — including understanding credit, budgeting, compound interest, the basics of pensions, how the stock market works, and more.

Remember that study we mentioned earlier about the anxiety people feel when passing on wealth? 

Many individuals are concerned their kids will squander the generational wealth getting passed down to them.

Financial literacy is one of the best solutions. 

By giving the children in your life a financial education and showing them the basics of finance, you'll enable them to take better control of their finances and handle any future wealth with confidence.

How to Use a Custodial Account to Build Generational Wealth

We’ve already covered some of the most popular methods that you can use to start building — or preserve — generational wealth. That being said, if you’re looking for a tax-beneficial and flexible way to save for the future, it’s definitely worth exploring custodial accounts.

A custodial account is an investment vehicle that enables you to save money for younger generations while those beneficiaries are still children. 

As a result, you could spend decades accumulating wealth to leave for the children you love and ensure a degree of financial freedom for them well into the future.

The way custodial accounts work is pretty simple. When an adult sets up a custodial account, they’re able to deposit assets and manage them on behalf of a named beneficiary. While that beneficiary is still a minor, the adult will be in charge of the assets — but it’s important to note that everything in the account is still the legal property of the child.

As soon as the child reaches the “age of majority” in their state, the custodianship ends. That means everything in the account passes onto the child beneficiary. In most states, that age is either going to be 18 or 21, but it can reach up to 25 in some instances.

There are two common types of custodial accounts: Uniform Gifts to Minors Act (UGMA) custodial accounts and Uniform Transfers to Minors Act (UTMA) accounts. Both account types are named after the legislation that created them, but there are a couple of key differences.

A UGMA account is designed to hold any number of financial asset classes like stock shares, bonds, ETFs, and mutual funds. A UTMA can also hold assets like fine art, real estate deeds, and intellectual property. 

UTMA accounts also aren’t available in all 50 states, which is why most families just decide to go for an UGMA account. Either way, you’re going to benefit from the same tax advantages.

Because everything in a custodial account is the legal property of its child beneficiary, that means the IRS taxes the account at the child’s rate — at least up to a certain point. 

Unearned income of up to $2,200 per year will always be taxed at a lower rate. Anything above that amount will be taxed at the higher adult rate of the custodian.

Another key advantage of custodial accounts is that they’re super flexible. 

There are plenty of other investment vehicles out there, like 529 plans or Roth IRAs, but they tend to be fairly restrictive in terms of when and how your beneficiaries can use the accumulated wealth.

With a custodial account, the kids you love can use those assets for whatever purpose they choose after coming of age.

Better yet, managing a custodial account can be incredibly simple — as long as you’re working with the right tools. That’s where EarlyBird comes in.

Using the EarlyBird app, adults are able to invest for kids and start building generational wealth using a fixed portfolio model. 

When you set up an account for a child with EarlyBird, you get the opportunity to choose from a range of ETF-based portfolios that are based on your risk tolerance, investment style, the age of the kids you’re saving for, and more.

Your friends, cousins, brothers, sisters, parents, coworkers, and neighbors can then use the app to gift money to any child’s account and help build that investment.

But individuals can send money to a child even if they haven’t got an account yet. All you’ve got to do is pick a phone number from your contacts, decide how much you’d like to invest, and then record a short video memory to personalize your gift.

What are the Challenges of Passing on Generational Wealth?

It’s one thing to build wealth to pass onto the next generation — but successfully transferring those assets down is another matter entirely. 

Fortunately, there are things you can do to overcome these challenges and maximize your family’s chances of retaining generational wealth.

Failure to plan

One of the biggest mistakes you can make when considering generational wealth is a failure to plan.

It doesn’t matter whether you’re just starting out or you’ve got millions of dollars in the bank: financial planning is critical. 

If you fail to develop a plan around how you plan to maintain, grow, and pass that wealth down, your chances of success are going to be hampered.

That’s why it’s critical to do your research and put all the right mechanisms into place to ensure that your wealth is protected for the future.

Poor communication

It’s absolutely vital that you develop a plan to safeguard and pass down your wealth to the children you love. But if you fail to communicate that plan with them, you could run into problems later on.

Everybody needs to be on the same page early on about how and where your wealth is kept, how it will be accessed, when, and by whom. This ensures the wealth can be successfully passed on to the next generation.

A lack of financial literacy

Saving for the kids you love can be challenging enough — but if those kids don’t know how to handle money, your efforts may ultimately be in vain.

Financial literacy is absolutely critical. According to the UK’s Money Advice Service, children usually develop firm financial habits by the age of seven. That means if you want to make sure the children you love develop positive financial habits, you’ve got to teach them early.

By helping the next generation in your household hone their financial literacy, you’ll be able to arm them with all the knowledge they need to preserve the wealth you’ve accumulated.

Family conflicts

Unfortunately, a common challenge that arises when handing down generational wealth is family conflicts.

Money can complicate things quite a bit. If some family members are doing financially well while others are struggling, it can lead to resentment when someone decides to pass on generational wealth through an inheritance or gift.

Again, this is where communication comes in handy. But to prevent future family conflicts, you may want to consider taking things a step further. Solutions include appointing a third-party agent or trustee to manage any funds that you’re able to pass on.

By using an intermediary, you’ll be able to create a neutral third party that can successfully mediate between relatives and ensures that your estate plan is executed exactly the way you want.

Conclusion

At the end of the day, we all want what’s best for the children we love. Generational wealth is a fantastic way to safeguard your finances and empower those kids with future financial freedoms. But you’ve got to think carefully about how you’re going to grow and pass on that wealth.

There are plenty of dynamic options worth exploring if you’d like to build or grow your existing generational wealth. You can invest in the stock market or real estate or focus on saving with any number of tax-efficient savings vehicles. But without a doubt, one of the best ways to preserve and build generational wealth is to use a custodial account.

Custodial accounts allow you to begin saving money for future generations while those beneficiaries are still minors. That could end up giving you decades to accumulate enough wealth to liberate the important children in your life from crippling future debts.

Anybody can set up a custodial account — but managing it can end up being kind of tricky if you haven’t got the right tools at your disposal. 

EarlyBird makes setting up and managing a UGMA custodial account fast, easy, and engaging. Download EarlyBird on the app store today to start building generational wealth for the kids you love.

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