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How to Build Generational Wealth (and Keep It)

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Do you want to set your children up, so they are financially secure, so that your future descendants have a great life? This is generational wealth.

Generational wealth is when you receive and create funds and assets that are passed down the generations. It’s setting your kids, and grandchildren, up with more financial freedom and ability to make their own wealth. This can be in any form and has cultural influences. For example, in India, generational wealth can be in the form of gold, and is passed from mother to daughter, while property may travel along the male line. In New Zealand, it could be in the form of property, cash, businesses, or investments.

Think of Paris Hilton, Jeff Bezos, Elon Musk, and Bill Gates. All these people used their parent’s wealth to create their own. Without the money, support, and education their parents provided, these people (arguably) would not have succeeded to the extent they have. Bill Gates has acknowledged that he did not have to work while getting his tertiary education, which allowed him to study more, spend countless hours ‘playing’ on computers, developing skills superior to his peers.

It’s a great concept, but it is fraught with problems. 70% of families lose their ‘generational wealth’ by the second generation, and 90% by the third. This is due to several reasons:

  • One generation works hard to create and accrue wealth, the next generation sees the diligence and struggle of their parents and respects it. However, the third generation never recognises the sacrifices made and are used to a privileged life
  • Wealthy families (still!) often fail to talk about money, teach the basics, or acknowledge the previous generation’s struggles
  • The older generation may think their children or grandchildren will waste their hard-earned money anyway, and choose to leave it to beneficiaries from outside the family. Bill Gates has said that his contribution to his kids is their education and ‘some’ money, but not a hefty inheritance
  • Some people find it very tough to acknowledge or plan for their death, and don’t plan their finances for the future.
  • When people die, some family members act in unusual or unexpected ways. This can result in financial divisions and arguments.

How to Grow Generational Wealth

Luckily, there are some steps you can take to ensure that your family will benefit from your diligence, for many generations to come.

Get the Basics Right

For yourself, you need to first focus on getting rid of debt and starting saving. Then, you need to invest that money in a place that makes you money. Traditionally, it could be in investments, property, or a business. Create multiple streams of income – the average millionaire has seven sources of income.

Involve Impartial Third Parties

Have someone involved in your estate that is a third party with no vested interest. They can help to resolve any disputes, and do so in a fair manner. Failing to account for family dynamics is a very significant threat to generational wealth.

If this person is a financial adviser, they can also help your family to make wise decisions moving forward, ensuring the money you worked so hard to earn isn’t lost or frittered away.

Life and Health Insurance

Make sure you have all the insurance you need so that your family isn’t left with huge bills once you’re gone. Life insurance means there will be money for the funeral and to get them back on their feet afterwards. Health insurance and income protection insurance can also be a wise investment if you’re of working age.

Teach the Financial Basics

You need to teach your family about money. Teaching your kids about money is surprisingly easy, but you have to be mindful about passing on your own bad money habits and attitudes.

Educate Your Kids

It’s a simple equation: The higher the education, the more your child can earn. Paying for their education is enabling them to make their own money. Education is correlated with higher incomes.

Know Your Taxes and Laws

It might seem clever to set up a trust, put everything you own in there, and then pass on all your wealth to your kids with no tax burden. While that’s a nice thought, it’s a lot more complex than that. Seek advice from a lawyer or financial adviser before setting up a trust in NZ.

There’s no inheritance tax or gift duty in New Zealand, but you may need to pay tax on income earned by the estate (such as rent or dividends on investments). If family are located overseas, they may be liable for inheritance taxes in their country of residence though.

Plan for Your Death

If you don’t plan for your death, then the government legislation steps in and makes those plans on your behalf.. Your property will be divided by laws of succession: Spouse/ partner, children, parents, siblings, grandparents, uncles and aunts. While it can be challenging to face your demise head-on, the outcomes of not planning could significantly alter your family’s future.

Also, make sure you communicate your wishes BEFORE you die. This may help to minimise any arguments or misunderstandings, which could be a highly volatile situation once you’re gone and unable to explain your decisions.

Consider Passing on Your Wealth Before You Die

If you’ve got money now, and you don’t need it, is it worth gifting to your family now? They can use it to start a business, or buy their own home. Rather than sitting on your funds, it could be building wealth for the next generation.

If You’re a Person of Colour, This Is Even More Important

Pākehā people are more likely to plan for intergenerational wealth. This means that they are giving their kids a more secure financial future, right from the start. If you are Pasifika, Māori, or another minority, this means it is even more important that you do this too. It gives your family freedom, and more opportunities than before, and helps to go some way to closing the wealth gap.

Get Financial Advice and Create a Secure Future

If you need help planning or executing a strategy for generational wealth, contact your financial adviser, they can help you set up your finances now to create wealth, and ensure it is looked after in the future. Don’t leave your family’s finances to chance.

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