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Nearly 50% of retired Americans pass away with less than $10,000 in savings according to the National Bureau of Economic Research.
While this number doesn’t surprise me, I certainly don’t expect it to get better. There is nearly $1.7 trillion in student loan balances outstanding and 8.7 million Americans over the age of 50 still paying off their student loans, as indicated by Bloomberg.
That said, with the odds starting to stack against younger Americans, there are still plenty of tried and true ways to build generational wealth.
But, before we get to that list, let’s clearly define the term generational wealth.
Definition of Generational Wealth
Generational wealth is money, securities, art, real estate, businesses, or any other asset with a monetary value that is passed down between one generation and the next. For example, a parent passing down stock investments to their children and grandchildren is an example of generational wealth. Starting life with inherited money can put one in an advantageous position to start, but it’s definitely not a show stopper.
Now let’s look at 8 tips for creating generational wealth.
1. Play The Long Term Game In The Stock Market
Now, there’s nothing wrong with making a quick buck in the stock market once in a while. But if you want to create true wealth, you need to adopt a long term strategy.
The majority of inherited assets in the United States are in the form of long-term capital gains. Not surprisingly, there’s such a fuss in Washington about stepped-up cost basis and the Biden Administration’s plan to eliminate it for gains in excess of $1million for individuals and $2.5million for couples.
Stepped-up cost basis allows heirs to step up the asset’s cost basis to fair market value and eliminate capital gains tax.
That said, investing in assets that generate long-term capital gains is still the number one way to create generational wealth.
2. Create an Estate Plan
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To illustrate, research shows that 70% of wealthy families lose their wealth by the second generation and an unbelievable 90% by the third generation!
Creating a detailed estate is the best way to ensure any wealth passed down will not be squandered away.
3. Open a 529 Savings Plan For Future Education Costs
A 529 saving plan is a tax-advantaged investment account designed to pay for education. Contributions are made on an after-tax basis, and withdraws are exempt from federal and state income taxes if used to pay for a qualified educational expense.
A 529 plan can be used to cover not only college costs but student loan repayments, apprenticeship expenses, and K-12 tuition.
While there is no annual contribution limit, there is a lifetime contribution cap depending on your state of residence.
New York: $520,000
New Jersey: $305,000
An interesting feature of 529 plans is that there is no limit on the number of plans that can be opened, but the contribution cap applies per state. So, if you’re wealthy enough you could fund multiple 529 accounts for your children, grandchildren, and relatives if they live in different states. Also, you can open a 529 plan in your own name and transfer it to a new beneficiary at a later date.
I recently discovered an exciting company called Fabric. This company offers life insurance, Wills, 529 savings plans, high yield savings account, and family finance tools making personal finance a seamless process for young families.
Many states also offer their own 529 plans, but it’s not always a requirement to open through your home state although there may be tax deductions or credits by opening through your home state.
Alternatively, most major retail brokerages also offer 529 savings plans.
4. Open Custodial Accounts
Custodial accounts are financial accounts held in the name of a minor, typically by a parent or legal guardian. These types of accounts are funded with after-tax dollars. You can fund UGMA/UTMA accounts with up to $15,000 per year or $30,000 per couple.
UGMA ( Uniform Gifts to Minors Act) The account must be handed over to the beneficiary when they turn 18. UGMA accounts can hold more traditional assets: stocks, bonds, ETFs, and cash.
UTMA ( Uniform Transfer to Minors Act) Account must be handed over to the beneficiary when they turn 25. UTMA accounts can essentially hold any type of assets: art, real estate, royalties, intellectual property, real estate, stocks, bonds, and ETFs.
The tax benefits for UGMA and UTMA are as follows:
- Up to $1,050 in earnings tax-free
- The next $1,050 is taxable at the child’s tax rate “kiddie tax”
- Any earnings over $2,100 are taxed at the parent or legal guardian rate
5. Have The Right Type of Insurance
If most of your income is earned from a job where you will stop getting paid if you show up, (e.g. 70% of U.S. Workers according to Pew Research) it would be extremely wise to purchase Term Life Insurance.
If something unexpected happens, you could still create generational wealth by having the right type and amount of insurance to ensure that your family and loved ones are secure.
Term Life Insurance from Ladder allows you to decrease or apply to increase your coverage as needed. My wife and I have insurance from Ladder and we plan to apply to increase our coverage when we start a family.
6. Create Your Own Annuity
There’s the ever-so-famous study that states millionaires have multiple streams of income. 7 streams to be exact. And there’s a good reason for it. While you certainly can earn a six figure salary working 9-5, you want to earn income even when you are not working, 24/7, 365 days a year.
The 7 streams of income are:
1. Dividend income (Owning Stocks)
2. Earned Income (Paycheck)
3. Rental Income (Real Estate)
4. Royalties from selling rights to use something they’ve written or invented.
5. Capital gains from selling appreciated assets.
6. Business Income (Business Ownership)
7. Interest from savings, CDs, bonds, or other lending activities.
You can undoubtedly create passive income by buying dividend-paying stocks, but if you can create a unique product or service and create your own annuity that will generate income without having to showing up to a desk, you certainly will increase the likelihood of creating generational wealth.
Let’s look an example:
You create widget X and make $1 per widget sold
100,000 people see your widget per month, but only 1% of them actually buy it.
100,000*1%=$1,000 per month
$12,000 per year for making $1 per widget that only 1% of your audience buys.
A simplified example, but the key tenets still apply.
Create your widget.
7. Talk About Generational Wealth With Friends and Older Adults
You don’t need to discuss specific numbers, but in most cases, there’s probably been someone you know who is in the same situation as you or has already been there. It’s good hearing feedback and bounce ideas off of other people.
Money shouldn’t be a taboo topic unless the main goal is to figure out how much money someone has to their name. The goal should be to help each other make the best decisions based on the information currently available.
8. Give Annual Gifts To Heirs
You don’t need wait until you pass away to wait to transfer wealth to your heirs. However, you certainly want to be sure you have enough money saved for retirement before you start gifting away your wealth. In 2020, parents can gift up to $15,000 per child before the gift tax kicks in. To be sure, to read the IRS tax rules on gift giving beforehand to remain in compliance.
The Bottom Line
At the end of the day, there’s not 100% right or wrong way to build and ensure you will create generational wealth. Everyone single person and family will have their nuanced approach.
However, if you follow the eight tenets listed above, you can create a solid foundational plan and increase the likelihood you will have assets to pass down your family and loved ones.