What is generational wealth?

Generational wealth is a lasting financial legacy that your family can benefit from and maintain for years to come. It includes everything from money, investments, and savings, to businesses and property. While it might seem like something only the super-wealthy can achieve, anyone can start building it. In this guide, we’ll take a look at different types of generational wealth and how they can be passed on, as well as steps to start building your own legacy.

Generational wealth refers to any assets or financial resources passed down within a family, from one generation to the next. This wealth might be in the form of money, a house, investment portfolios, businesses, or other valuable items. It’s often passed down as an inheritance after someone’s death, but can also be transferred while the giver is still alive.

It’s hard to put a number on what counts as generational wealth. The wealth simply needs to be handed down to a younger generation in a way that offers them a leg up in life, which can look different for each family. For some, it may mean life-changing funds that allow them to enjoy a good education, buy a home, or start a business. For others, it might be a more modest amount that still makes a difference.

A key feature of generational wealth is that it grows with each handoff. Of course, that’s a best-case scenario that doesn’t always happen in reality. For the next generation to really benefit, it mainly depends on how well the assets are managed and the level of communication within the family.

Generational wealth might bring to mind the image of a child inheriting a family business and running it into the ground. However, it can take many more common forms.

Other examples of generational wealth include:

• Money, savings, investments (stocks, bonds, retirement accounts)

• Family homes, rental properties, land

• Family heirlooms, collectable items, precious metals, gems, art, antiques, or other alternative investments

• Family-run businesses passed down through generations

• Patents, copyrights, trademarks

• Endowments or trusts set up to provide ongoing benefits for the next generation or a charity

• Private equity

You might have worked hard to grow your own wealth and naturally want to enjoy the fruits of your efforts. However, by building generational wealth, you can give your children and grandchildren opportunities you might not have had, giving them a head start in life. Some compare it to a snowball, gradually growing over time to provide future generations with greater financial comfort.

Comparing the generations, younger generations these days are facing soaring rental costs and many are struggling to get on the housing ladder. In comparison, older generations have enjoyed significant advantages, and indeed they hold the bulk of wealth today. According to a report, a huge £7 trillion* (in today’s money) will pass between generations in the UK over the next 30 years.

Despite its importance, building generational wealth in the UK is not without its challenges. The same report shows that more than half of wealthy families in this country lose their wealth by the second or third generation. Some wealth loss is only natural thanks to taxation or inheritances being divided, but some can be avoided with careful planning, management, and communication.

Generational money and assets can be transferred to the next generation during your lifetime or after death.

1. Transfer during life. This can include giving money or property directly to younger family members or even using “upstream” gifting, where wealth is passed to older relatives. This strategy can sometimes offer tax advantages, depending on the circumstances. Learn more about gifting money to children.

2. Transfer after death. The most common method is through a will, a legal document where you detail what you want to happen to your estate after your death. That way, you know your wealth will be distributed according to your wishes. 

Both methods can incur taxation, such as inheritance tax or gift tax, which can affect the value of the assets passed down. A financial adviser can help you decide what’s best for your specific circumstances, and reduce any potential tax burdens. 

Raisin UK has a range of resources on how taxes work, including the following pages:

Building generational wealth isn’t just about gathering lots of assets and putting them in your will. Perhaps more importantly, it involves teaching the next generation to manage those assets responsibly in a way that encourages growth and keeps the money in the family.

Paying off debt is an important first step. By clearing any high-interest loans like credit cards and personal loans, you start from a clean slate and free up cash that can then be redirected towards activities that build wealth. Reducing debt is also an effective way to improve your credit score.

Investing in property is generally considered one of the most reliable ways to build generational wealth in the UK. You build equity, which offers potential income, and the value is likely to appreciate over time. If buying a house seems out of reach, even a small flat can be a starting point.

By building a diversified investment portfolio through the stock market and tax-advantaged accounts like ISAs, you’re more likely to benefit from compound growth. While investing carries the risk of losing your initial investment, by taking a consistent approach and sticking with them for the long term, you can spread some of that risk while also increasing the likelihood of making greater returns over time.

As one of the two ways to transfer generational wealth, proper estate planning and management – including creating a will – can help to protect family assets. Choosing who you want to receive your assets gives you peace of mind that they will end up in the right hands after you pass away.

This is perhaps one of the most important steps for preventing any misunderstanding or issues with family members during wealth transfers. It’s also key for avoiding losses as the wealth is passed on. Talking with your children about money and teaching financial literacy, such as budgeting, saving, and investing, prepares them to manage their inheritances responsibly. As a result, they are equipped with the skills to grow their wealth and take care of it for the next generation.

While not a realistic or even desired option for everyone, starting and growing a sustainable family business can offer a legacy that lasts for generations to come. Family businesses can also strengthen family ties.

The information provided here is for informational and educational purposes only and does not constitute financial advice. Please consult with a licensed financial adviser or professional before making any financial decisions. Your financial situation is unique, and the information provided may not be suitable for your specific circumstances. We are not liable for any financial decisions or actions you take based on this information.

If you’re looking to build long-term wealth for future generations while avoiding the risks that come with market fluctuations, a high-interest savings account could be ideal. With a fixed rate bond, for example, you’ll enjoy a competitive interest rate that stays the same throughout the term of your investment, ensuring a steady, reliable return.

Opening a savings account with Raisin UK is simple and free. By registering today, you can access competitive interest rates from a variety of trusted banks and building societies from across Europe, helping you grow your wealth for your children and grandchildren.

*https://www.ftadviser.com/investments/2024/08/16/preparing-for-the-great-uk-wealth-transfer/

The answer to what counts as “wealth” can be subjective; what one person considers substantial might not feel that way to someone else.

That said, a clear sign of generational wealth is significant financial support. If your parents set up a trust fund, covered your education costs, or helped with a house deposit, you’re likely benefiting from generational money.

Another indication is if you inherit assets that help with living costs or boost your retirement savings. If an inheritance allows you to retire early or live without the financial worries that many of your peers face, that could be an indicator of generational wealth. It essentially lets you live comfortably and make plans for the future without having to make ends meet.

There are several reasons why wealth might not transfer well to the next generation, including:

• Lack of preparation – Many heirs are unprepared for their inheritance, especially when it includes a family business. They simply lack the knowledge required to manage their wealth. As a result, they may make poor financial decisions and end up losing their money.

• Poor communication – Families need to have clear conversations and keep their children and grandchildren in the loop about finances and what will be expected of them. This will also help them understand the importance of the family legacy.

• Lifestyle choices – Alongside taxes that can eat into inheritances, heirs’ own decisions, such as how they invest, the size of their family, or divorce, can significantly impact the long-term success of generational wealth.

If you feel you’re behind or haven’t managed to build much wealth by your 30s or 40s, it’s never too late to start investing in your future, or that of the next generation. Even if you’re at a later stage in life, there’s always something you can do. The goal is to simply begin, no matter where you’re starting from. Building generational wealth should be seen as a long-term goal that can start at any point in life. For some ideas, see our page on where to invest money in 2024 to get started.