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What is generational wealth and why is it important?

Generational wealth is wealth that gets transferred from one generation of a family to the next. It may consist of valuable assets such as cash, real estate securities or ownership of a family business. Generational wealth may also take the form of education, contacts, ability to take greater risks and lucrative employment within a family business.

Kinds of Generational Wealth Transfer

People transfer wealth to succeeding generations using a variety of means. Some involve cash or other tangible assets, while others are intangible. They include:

  • When parents or other benefactors die, the terms of their wills may transfer valuable assets such as cash, securities, real estate, collectibles and art to offspring or other beneficiaries.

  • Inter vivos. These gifts occur while both giver and recipient are still living. They are less common than inheritance as a means to transfer wealth across generations.

  • One generation can transfer wealth to the next generation by providing high-quality primary education and by funding college. People who are able to graduate from college without student loans can begin building their own wealth sooner than those who are encumbered by college debt.

  • Family business employment. Providing lucrative jobs at family-owned businesses is an important way families transfer wealth to younger generations.

  • Access to networks of potential future employers, investors, mentors and other helpful individuals is another way being a member of a wealthy family can benefit someone and is, arguably, a form of generational wealth transfer.

  • Financial literacy. Families can provide wealth-building benefits to later generations by seeing that heirs receive training in budgeting, saving, investing and other aspects of personal finance.

  • Resume-building experiences. Generational wealth can also take the form of taking on family business responsibilities, serving on charitable boards and other experiences that enhance the career and income prospects of members of succeeding generations.

Only 10.1% of black families and 7.2% of Hispanic families actually received an inheritance, while that figure is notably higher (29.9%) among white households.

Why Is Generational Wealth Important?

Generational wealth gives parents the financial ability to equip their children for the future. It helps recipients overcome any constraints associated with starting a business or even getting a quality education. This, in turn, paves the way for higher income and enables new generations to build their own wealth.

Another important effect of generational inheritance is the mindset that it fosters among those on the receiving end. If entrepreneurs know they can rely on family money, they’re more inclined to jump into riskier and potentially lucrative investments.

On the other hand, individuals who come from low-income backgrounds have a far more cautious decision-making process and often lack the risk-taking abilities that created many of the world’s most successful businesses.

As such, generational wealth is an important springboard. It takes younger people who might otherwise be starting from zero a few steps up the financial ladder, which makes it exponentially easier to begin building their own wealth.

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