How to build (and destroy) generational wealth

How to build (and destroy) generational wealth

Building wealth is hard.

Building generational wealth is even harder.

By generational wealth, we of course mean passing down assets, whether it’s a cash inheritance, property, businesses, and other valuables from one generation to the next.

Managed properly, it can provide financial security and opportunities for future heirs, or a legacy for years to come. 

But, despite the many benefits of generational wealth, it can also perpetuate existing social and economic inequalities (as it tends to be concentrated in certain families and communities), ruin the motivation of the heirs and create conflicts within your family.

So, how do you build generational wealth and perhaps more importantly, avoid destroying it?

Your choice of generational wealth strategy will mainly depend on the amount of wealth you aim to amass and leave to your descendants in the future.

In most cases, those who have built a significant, multi-generational fortune that can last for many generations, have started a successful business. Some exceptions exist – but not many. 

When looking at how the wealthiest households have created wealth, this is the common theme. Business ownership is central to their fortunes. 

The Walton family, known for founding Walmart, accumulated a fortune exceeding $200 billion, making them the wealthiest family in America. Similarly, many of the billionaires on Forbes’ 400 list acquired their wealth through successful business ventures. Even among the 30% who inherited a significant portion of their wealth, the inheritance typically originated from a business that proved lucrative.

Creating a successful business is not easy and often a long road (believe me). But, if vast wealth is your desire, this is your path. 

So, what about those who don’t own businesses?

We help many successful families thrive and flourish, many of whom have a family steward (an individual who takes on the responsibility of managing and preserving a family’s wealth and legacy for future generations) at the helm.

There are some simple steps you can take to leave behind generational wealth that can still impact your family’s financial future considerably. 

  1. Start early: perhaps more advice for your children or grandchildren – the earlier they start investing, the more time their money has to compound and grow.
  2. Save and invest diligently: holding a low-cost portfolio invested in the world’s best companies is the most reliable way to build wealth. There is over a century’s worth of data to back this up.
  3. Remember tax: it’s important to consider the tax implications when passing down wealth. Depending on the size of your estate and the jurisdiction in which you live, your heirs may be subject to estate or inheritance taxes. Get help from a legal and financial professional, so you can develop a plan to anticipate these expenses and minimise their impact on your beneficiaries.

Taking the right steps today can make things much easier for your future heirs.

What destroys generational wealth?

As Charlie Munger once said:

“The first rule of compounding is to never interrupt it unnecessarily.”

Here are some typical factors that contribute to the loss of generational wealth. By avoiding them, you and your heirs can improve the chances of maintaining wealth for the next generation:

  1. Family disputes and legal battles: disagreements over the division of wealth can lead to unnecessary legal battles and strained relationships among family members. You can prevent this by creating a culture of open and honest communication within your family. Remember that it’s crucial to work towards a common goal of preserving your family’s wealth and legacy for future generations.
  2. Poor financial management: without proper financial education and planning, managing assets can be challenging, and it may lead to the gradual depletion of generational wealth. To avoid this, it’s important to practice sound financial habits and pass on financial literacy to your family members – particularly around subjects like overspending.
  3. Inadequate estate planning: it’s important to create a comprehensive estate plan that includes wills, trusts, and other legal mechanisms to avoid any unintended consequences. By doing so, you can minimize hefty estate taxes, probate fees, and other legal expenses that can significantly reduce the amount of wealth you pass on to the next generation.
  4. Marital issues and divorce: divorce can have a significant impact on your family’s finances, including generational wealth. To protect your family’s fortune. This is just one of many life transitions that can affect your wealth.
  5. Your family growing: as your family grows and assets are spread out among more individuals, it may become increasingly challenging to maintain generational wealth over time.
  6. Lack of diversification: it’s important to avoid putting all your eggs in one basket. Having most of your wealth tied up in a single asset class, industry, or geographic location can be risky. Any economic downturn or industry disruption could have a significant impact on your finances, potentially leading to a loss of generational wealth. Diversification is key to mitigating this risk.

Despite taking steps to minimise risks such as estate taxes, family conflicts, and diversification, generational wealth can still be impacted by market volatility.

The Vanderbilts, one of America’s wealthiest families, learned this lesson the hard way during the Great Depression. Despite their vast assets declining, they continued to spend excessively, resulting in a significant loss of their fortune.

Generational wealth has the potential to offer financial stability and opportunities for future generations, but it’s important to acknowledge that it can also create challenges that affect individuals and society.

This might include loss of work ethic, difficulty in forming genuine relationships, pressure to maintain wealth and family conflict. 

As a family steward, it’s important to guide your heirs towards a strong set of values, a good work ethic, and an understanding of the role of money in society. This can better prepare them to handle their inheritance responsibly and make informed decisions when the time comes.

Of course, there are no guarantees, but educating them on these important topics can go a long way in ensuring a positive outcome for future generations.

By instilling the values of financial education, philanthropy, and a sense of purpose beyond wealth accumulation, you can leave behind a legacy that not only benefits your heirs, but also contributes positively to society.

There’s no doubt generational wealth can be a double-edged sword.

But the hardest part is creating and preserving it over time. 

Ultimately, ensuring a lasting legacy means finding the right balance between supporting your heirs financially and guiding them to live fulfilling lives.


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