Picture it: You graduate from university and start working, learning to save and invest. Next thing you know you’re married and starting a family. Finally, you’ve built up considerable savings or maybe even started a business. You start thinking about wealth preservation. You want to be sure your assets can be passed down to the next generation — i.e. generational wealth.
What does this process look like? We’ve outlined 8 tips to help.
Table of contents
- What is generational wealth?
- Why is generational wealth important?
- How to create and build generational wealth in Canada: 8 tips
What is generational wealth?
Generational wealth refers to the assets — cash, real estate, investments, small businesses, etc — that you pass to your children/grandchild. In turn, they’ll pass this wealth to the generation after, and so on.
This type of wealth is often called ‘legacy wealth’ or ‘family wealth.’
How much money qualifies as ‘generational wealth’?
As Willful explains, “for any amount of wealth to be considered generational wealth, it simply has to be passed down by at least one generation.” Here is an example they use:
“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.”
How do you transfer generational wealth?
In order to effectively make sure that your children, grandchildren, and subsequent generations benefit from this wealth foundation, you’re going to need effective strategies — and likely the help of a professional.
Some people choose to integrate the transfer of their wealth into their estate plan. Others might decide to pay education costs for children, help with a downpayment, or even start the process of transferring ownership of a family business — all while still living.
The steps we list below give you a better idea of what you need to do to make sure there’s a smooth transition of wealth, including ever-important estate planning.
What is the ‘Great Wealth Transfer’?
The ‘Great Wealth Transfer’ refers to the significant transfer of wealth happening right now.
As the Baby Boomer generation retires, ages, and passes away, their children and grandchildren will be beneficiaries of their wealth.
In Canada alone, according to RBC Wealth Management, younger generations will inherit about $150 billion before 2026. In the United States, that number is closer to a staggering $68 trillion by 2030, says Coldwell Banker. These days, estate planning and the creation of an inheritance plan is big business!
How long does generational wealth last?
Ideally? Forever. The goal is to create foundational wealth that can be passed down from generation to generation — all while being continuously invested and properly maintained.
A common estimation is that 70% of wealthy families will lose their wealth by the second generation. Even more, 90% will lose it by the third. This, clearly, underlines the importance of planning out the transfer of wealth, maintaining clear communication, and learning money management skills.
Why is generational wealth important?
It comes down to giving yourself and your family an advantage. A leg up, if you will.
When your child has a fully-paid education or a business to take over? They’re in a better position for success. This goes hand in hand with making sure they have the confidence to manage any assets they inherit.
How to create and build generational wealth in Canada: 8 tips
Invest in education for your child
When you find out you’re expecting a child, you’re probably not thinking too far ahead. Your focus is going to be on preparing for an infant, right?
But when you start saving for that child’s education as soon as possible (RESPs are a great tool for this!), you’re going to give them the opportunity to go to school with as little debt as possible. In turn, this will mean they’ll graduate that much more ahead.
Teach your kids about money
As we explain in our article When To Teach Kids About Money, a big part of setting up a solid foundation for your kids is by teaching them about money.
Weaving age-appropriate money management lessons into everyday life can give your kids an understanding of concepts like saving and smart budgeting. As they get older, these lessons can be about investing and credit. Eventually, they’ll have a strong level of financial literacy that gives them the confidence to make smart decisions about money. As a result, they’re equipped to manage inherited wealth.
Invest, Invest, Invest
Invest your savings in a wide variety of assets so it grows and generates returns passively. If you start early enough (again, underlining the importance of financial literacy at a young age) and diversify your portfolio, you’ll be able to build a sizeable nest egg by the time you retire or prepare to pass along an inheritance.
Where the magic is, is with compound interest, i.e. when you reinvest your earnings, which then generate interest.
Related Reading: How To Invest $1000, $10k, or $100k
What investments build generational wealth?
Many experts point specifically to investing in the stock market — via a diverse portfolio — as a way to passively build wealth and protect your money from inflation. Stocks, ETFs, index funds, mutual funds, and Real Estate Investment Trusts (REITs) can all yield significant returns. Low-cost index funds are a particularly attractive choice for a buy-and-hold strategy. If chosen carefully (or with the help of an investment advisor), you can see long-term growth by investing in the market.
Investing in real estate
We mention REITs above because they allow you to participate in real estate investing without having to finance and manage a property. That said, investing in real estate and potentially building a whole portfolio of properties, can, in turn, bring steady cash flow, and a way of building wealth to pass along.
Start a family business
Simply put, a successful family business can be passed down. These businesses provide steady income, revenue for the family, and job opportunities for younger generations once they reach the appropriate age.
Is there a possibility that your children might want to branch out beyond the family business? Sure. But if the company has done well, one option is to sell it, investing the proceeds to further build up the family wealth.
A sudden death comes with a whole range of costs. Having a solid life insurance policy means that debts, mortgages, funeral expenses, day-to-day expenses etc are all covered. Ultimately, it’s a safety net for your children and grandchild.
In addition, most life insurance payouts are not taxed. Taxes do come into play if the estate is listed as a beneficiary. As a result, make sure you appoint specific beneficiaries!
This leads to another crucial generational wealth factor: estate planning. How else are you going to actually pass along the generational wealth without a legal will, trust, and beneficiaries?
According to Willful, 58% of affluent Canadians have not discussed their instructions for their estate with their heirs. They also cite a 2022 PolicyMe survey that found 11% of Canadians made or updated their will/end of life plans in 2021.
Having an estate plan in place makes sure your wishes are fully in your own control. It ensures your family will benefit from the wealth you’ve built up. Even more, working with a professional who can guide you and your family through any tax implications will help you keep even more of this wealth in the family.
A 2017 Investor Economics Household Balance Sheet Report found that by 2026, it’s estimated that women investors will directly control approximately half of all personal wealth. Meanwhile, a 2021 Fidelity report shows that only 33% of women actually see themselves as investors. The same report also found that 42% feel confident in their ability to save for future milestones like retirement.
Digging in further, The Motley Fool reviewed 20 years’ worth of research on women and investing, finding that:
- Women tend to invest more conservatively than men
- Women have better investment returns than men (with some research showing up to 1% better returns)
- Women are less impulsive investors than men
Women (and especially women of colour, queer and trans women, and Indigenous women) frequently face barriers when it comes to building wealth. These include wage gaps, underemployment, and having to leave (or partially leave) the workforce to be caregivers. These larger systemic issues certainly need to be addressed on a broader scale. But when women are empowered with their money — and the knowledge to make the decisions that work best for them and their families — subsequent generations do benefit.
Work with an advisor
Essentially, there’s a lot of planning involved with preparing and actually transferring wealth to subsequent generations. For those involved, it can be akin to wading in unfamiliar waters. Hiring a financial advisor can act as a metaphorical boat.
One particularly important aspect where a professional would be invaluable? Tax implications — both making sure necessary taxes are paid, and implementing strategies to limit the amount of taxes needing to be paid in the first place.
Another reason why working with an advisor is important when it comes to generational wealth is the financial literacy factor. Simply put, some involved family members (or even yourself) might have a basic knowledge of finances or financial strategy. A trusted financial advisor will be able to clearly outline what needs to be done, and how best to do so.
Passing wealth to your children and grandchildren is a lot of work, but the benefits are very evident. Even more so if you give them the necessary knowledge and tools to manage this wealth. Make sure you have ongoing family discussions about finances, even if you (wisely) bring a financial advisor in to help. After all, generational wealth is all about the long game. And communication is a crucial part of the wealth-building and preservation process!