First-time wealth builders often fare better with advisors who can help them achieve their goals. However, those advisors must consider a variety of factors, including familial and cultural values, as part of charting the best way to achieve client objectives with regard to generational wealth.
Establishing generational wealth requires a higher level of planning and commitment than arranging for a one-time exchange of assets, Marguerita “Rita” Cheng said in an interview. She is the CEO and founder of Blue Ocean Global Wealth.
“To me, inheritance might refer to a one-time event, a passing of assets, upon someone’s death,” said Cheng. Whereas generational wealth is “an ongoing transfer of wealth,” she explained.
“It’s passing on wealth, and the person doesn’t necessarily have to be gone (to do so). They can see their wealth in action,” Cheng said.
First-generation wealth builders often face a learning curve, not just in acquiring wealth, but understanding the basics of estate planning, insurance and other foundational tools for preserving wealth, Cheng said.
“It’s not because you don’t know anything, but you haven’t experienced that. We might talk about estate planning and insurance,” she says of clients. “Insurance is a very powerful tool for wealth transfer. It’s important (as an advisor) to be mindful and set the stage for discussing these topics,” she explained.
Some critical discussions may include making sure individuals understand the benefits available to them through work, Cheng said. She cited life insurance as just one example.
‘Generational Wealth’ Open to Interpretation
What “generational wealth” means also varies from one person to another. Therefore, it’s important to understand what individuals want to achieve as they build wealth.
“I am really intentional about taking the time to connect with others. I think even asking the question: ‘What does generational wealth mean to you and your family?’ is important,” Cheng said.
“The most important thing is to ask people and set the stage, and they’ll tell you what’s important to them. I had one client who said they never had children of their own, but their nephew was like their child and they would really like, if anything were to happen to them, for him to have enough money to go to school,” Cheng shared.
Another key factor to consider is that individuals aiming to build generational wealth may be overwhelmed just by nature of being the “first.”
“There are some experiences where people may feel a little bit guilty for being the first,” to have certain financial resources, Cheng said. “Also, understanding that being the first — the first person to buy a home, start a business, or to have equity compensation in your family — there’s emotions (around that).”
Maybe for the first time, individuals are faced with the responsibility of what to do with large amounts of money, as well as how they will set boundaries with loved ones, she added.
“One of the best things you can do is take care of yourself. Put your mask on first,” Cheng said.
Taking Culture Into Account
She noted that individuals’ plans for their wealth may also be impacted by their cultural background and values.
A 2023 study by J.P. Morgan Wealth Management found that many Black, Hispanic and Latina women start investing in order to build generational wealth and support family and friends. In fact, 68% of Black, Hispanic and Latina women investor respondents cited generational wealth as the motivating factor for their investing. Only 55% of white investors who were surveyed said the same.
“Culturally, Black, Hispanic and Latino Americans are more likely to financially support extended family members and friends,” Kira Forbes, who serves as the Black, Hispanic and Latino team lead for J.P. Morgan Wealth Management’s inclusive investing team, said in the report. “As a result, they may feel a more pressing need to set their community and future generations up for financial success.”
For someone focused on building generational wealth, Cheng noted that having a financial planner, or more generally a financial plan, would be beneficial. But advisors should understand there may be more at play when a client struggles to stick to their financial plan.
“Sometimes when someone is not implementing the plan, there’s a lot more to it,” Cheng said. Individuals’ financial plans may not appear to align with their cultural values, for instance. “Some cultures are more collectivist than individualist,” she added.
Covering Costs of Education
Lindy Venustus is the CEO and Founder of Create Financial Planning. She said that having wealth to pass down to future generations, specifically for educational expenses, is important for many clients.
She likes 529 plans as individuals can transfer the assets to beneficiaries, who can be anyone in their extended family.
“529 plan assets are invested, but if you use it for college expenses, you are not paying on the growth of it,” from a tax perspective, Venustus said.
The beneficiary of a 529 plan can be any relative through blood, marriage or adoption, according to the IRS.
“If you can help people with education, take that expense off the table and help them start out successfully, that’s huge,” Venustus said, noting that she sees many instances where even high earners have student loan debt that eats into much of their income.
‘Super Saving’ to Build Generational Wealth
Venustus also recommends that individuals trying to build generational wealth put money into Roth RIAs. These accounts are one of the best ways to “leave someone money without creating a tax burden.” After all, those contributions aren’t taxed. They generally involve post-tax dollars, and the designated heir will not have to pay taxes on withdrawals.
She further generally advises that individuals live within their means and be “super savers.” That can allow them to accumulate the level of wealth that can be passed on.
“I get really excited when a clients’ fixed expenses are less than half of their income. Hopefully, their lifestyle is less than 30% of what they are spending. That should give them 20% of what they are bringing home to either put into other savings or investment accounts — or towards other goals they want to accomplish,” Venustus said.
“For a family with $500,000 or more (in annual income), that family can try to live like the $100,000 family to try to save and build that generational wealth,” she said.
Generational Wealth Beyond Real Estate
Historically, home ownership is one of the top sources of wealth creation. However, Cheng noted that individuals should be aware that it isn’t their only pathway to building generational wealth.
Home ownership is “a lot harder” today, due to housing affordability concerns, she added.
“Real estate is how many people have built wealth historically, but owning a home is not the only way in which you can build wealth,” Cheng continued.
“I have clients who live in New York and work in tech. The thing I’m really mindful of for these clients, because they may be on the younger side, is they can build wealth through retirement accounts and through equity compensation.”
A 2020 report by the Brookings Institution recommended that policymakers encourage U.S. households to build “more balanced” and liquid savings, and not only focus on homeownership for wealth creation.
The report cited a variety of factors as reasons why this shift would be beneficial. Among them, it noted homeownership introduces some financial risk to households. It further pointed to a long history of racial discrimination in the housing and mortgage markets as another concern.
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