Generational wealth refers to the transfer of your assets—cash, real estate, investments, small businesses—from you to your children to your grandchildren to your great-grandchildren and beyond. It involves investing wisely, planning strategically, and teaching your children how to manage money prudently.
Given that only 30% of all wealth transfers in Canada are successful, with 95% of those failing attributable to a breakdown in family communication, it’s absolutely essential that you start planning your transfer of wealth, as well as educating your descendants on what to do when you pass, while you still have time.(1)
Let’s take a look at what constitutes generational wealth, some ways to build it, as well as what should be done when you’re no longer the primary estate holder.
What is generational wealth?
Generational wealth is your financial legacy.
It’s the financial resources you leave to your descendants, which could help them get a jumpstart in life. It’s the money you’ve earned, the savings you’ve amassed, the small business you grew, the house and real estate properties you took care of.
It’s your material possessions, but it’s also much more than those. It’s the financial wisdom you’ve learned over the years, the wisdom you can teach to your descendants, helping them take care of the assets you’ve left in their hands.
What investments can build generational wealth?
Building generational wealth means having more than you’ll ever need, which ensures your descendants receive a piece of your estate. In order to save that much money, you’ll likely need to invest your savings in assets that have the potential to generate significant returns. Here are just three such assets that can do that.
Perhaps the best way to amass generational wealth is to invest in the stock market.
More so than any other asset, stocks have unlimited upward potential, meaning you could double, triple, or 20x your initial investment. Nothing is guaranteed (stocks have risks), but if you learn to invest wisely—a skill you can teach to your descendants—you could possibly accumulate enough wealth to pass down for several generations.
To start, open an account with one of Canada’s best online brokerages. From there, you can invest in the companies you believe have long-term potential.
Those who aren’t ready to invest in stocks could still capitalize on stock market growth through exchange-traded funds (ETFs).
An ETF is a basket of stocks (or other securities) that’s passively managed, meaning it tracks a market index. When you buy a share of an ETF, you get a little piece of each of these stocks. Unlike stock investing, you’ll never beat the market (ETFs track the market, but they don’t beat it). On the other hand, because your money is spread across numerous stocks, you get instant diversification.
An ETF is great for those who want to deep their feet in the stock market, but aren’t ready to invest in individual stocks. They have lower fees than mutual funds, and like stocks, you can trade them on an exchange during market hours.
Along with stocks and ETFs, real estate properties have immense potential for accumulating wealth. When done right, real estate investing can create a strong cash flow, one that could continue to serve your family far after your death.
For starters, your primary home is real estate investing. Your home will likely appreciate over time. Other examples of real estate investing include flipping houses, renting out residential or commercial property, buying vacation homes, or even buying land.
If you don’t have time to manage properties, you could invest in a real estate ETF or you could invest in a REIF. Both of these expose you to the real estate market without requiring you to buy property.
How do you transfer generational wealth?
Many people start transfering their wealth to descendants while they’re still alive. They may help children or grandchildren pay for secondary education. Or they help them buy their first home, or even hire them to work in the family business, grooming the descendants to take over when they retire.
The majority of your wealth, however, will most likely be transferred after your death. In order to make the transfer of money as smooth as possible, you should start by making a detailed account of your assets and properties. Financial documents, such as investments statements, income statements, and tax documents, along with insurance and legal documents, should be kept in a safe place. This will not only help your descendants when the time comes to transfer assets into their name, it can also help your financial planner, if you choose to hire one, analyze your estate.
Next, you’ll have to designate roles to specific people in your family. You’ll need an executor (or liquidator in Quebac) who will be the primary person managing your estate after you die. They’ll likely handle your final tax filing, pay off any debts, and hand out assets to your inheritors.
If you want your descendants to receive their inheritance at a certain age, you’ll likely set up trusts, for which you’ll need to name a trustee. The trustee basically takes on the role of executor once the executor has distributed assets to your descendants, as well as set money into the trusts. Often your executor and trustee are the same person, as you’ll likely want the most reliable person you know to handle your estate and trusts.
Two other potential roles are legal guardian and mandatory. A legal guardian is someone who promises to take care of your children and assets if you and your partner pass away before your children are adults. A mandatory takes care of your assets, as well as your well-being, if you become incapacited.
In addition to these, you’ll also want to name beneficiaries to your investment accounts, if you haven’t already.
How can you help your children pass on the legacy?
Perhaps the most effective way to ensure your descendants manage your wealth prudently is to teach them how to budget, save, and spend money from an early age.
What’s the best age to start? Well, according to a report by the RBC, most Canadians begin to receive “structured financial education” at 26.(2) The report goes on to say that this is the age when financial literacy is more or less compulsory to your well-being: at 26, you’re starting to make financial decisions on your own, and you’re beginning to realize your management of money has a profound impact on your possibilities and livelihood.
But, as the RBC suggests, 26 is far too late. Since many Canadians receive an inheritance from a grandparent, that leaves very little time between learning how to manage money prudently and receiving a large sum of money.
Instead, the report suggests teaching children about money before they turn 18. When children receive financial education before 18, they feel more confident about making financial decisions (66%), versus those who learn how to handle money sometime after 18.
Regardless of how early you give your children formal education on how to use money wisely, they will instinctively learn by watching you. You will be their best example of how to spend, save, and budget. The formal education will only reinforce the financial principles that you yourself are already practicing.
Foolish bottom line on generational wealth
Generational wealth ensures that your hard-earned cash, investments, real estate, and other assets stay within your immediate family.
Even if you’re still young, or you’re new to investing, it’s a good idea to begin planning the transfer of your estate now rather than later. Perhaps the best place to start is with a will. Even if your will changes numerous times over your life, as you add more people to your family or generate more wealth, having one in place will make the transfer of your wealth smoother, should something unexpected happen to you.