Foundations of Generational Wealth 

What is Generational Wealth? 

With the cost-of-living increasing year after year, wages staying stagnant, and the wealth gap widening to unprecedented heights, generational wealth has been a hot topic. Generational wealth transfer is crucial for long-term financial stability within families, highlighting disparities in wealth transfer and the importance of effective estate planning. When we think of Generational Wealth, we often think of substantial amounts of assets being passed down from one generation to the next, however, it is more complex than that. 

Generational Wealth in its simplest form, is the transfer of assets and money from one generation to the next.  

Generational wealth transfers can include cash, real estate, bonds, investments, and even businesses. However, Generational Wealth is a holistic and strategic approach to building long-term financial stability that can be passed down between generations. Generational Wealth is one of the most advantageous gifts a person can be given. It opens many doors, provides access to things and opportunities that may not have otherwise been available without. It has the potential to transform the lives of generations for years to come, can alleviate some of the racial and gender wealth inequalities, and provides financial safety and security. 

What influences Generational Wealth? 

There are many interrelated factors that influence generational wealth, from smaller individual factors such as personal finance, to larger systemic barriers such as wealth disparities amongst races and genders which can influence one’s personal factors as well. Understanding available financial resources is crucial in creating effective wealth-building strategies. 

The largest influence on generational wealth is the existence of prior generational wealth itself. The access and pathways to generating wealth are much simpler and defined when wealth is already the starting point. However, it is not impossible for someone with more humble beginnings to accumulate wealth during their lifetime to pass it on to the generation after them. 

Some of the personal factors that can influence generational wealth are personal finance habits such as saving and investing, income and job opportunities, and financial literacy. Having financial literacy and good personal finance habits such as investing and savings can lead to accumulating generational wealth by spending less and saving more for the future and being proactive about estate planning.  

It is also important to consider the implications of the federal estate tax when planning to pass on wealth. Having a higher income, higher education and access to jobs with benefits such as 401ks and other investment opportunities can lead to the creation of generational wealth. Even homeownership and owning real estate can lead to the transfer of generational wealth through transfer of property intergenerationally. Families can also maximize their gifting potential by understanding federal gift taxes and staying within the annual exclusion limit for monetary gifts. 

Another factor that can influence generational wealth greatly is family dynamics. Having close family dynamics allows for the transfer of wealth intergenerationally and fosters conversations about estate planning and division of wealth amongst beneficiaries. The combination of all factors can be what influences someone who may not have previously benefited from generational to begin to create wealth to be passed on to the generation after them, allowing for the initial wealth to expand and be passed down, thus creating the cycle of generational wealth.  

Of course, the larger social structures and systemic barriers influence the accumulation of generational wealth. Your race, gender, and socioeconomic background all have an impact on the jobs you may have access to, the amount of financial literacy you may have been exposed to, and even having the ability to own property as opposed to renting. 

Best Practices

• Educate yourself and your family on financial literacy, focusing on saving, investing, and estate planning to build a solid foundation for future generations.  
• Explore opportunities for homeownership, investments, and higher education to create pathways for wealth accumulation and long-term financial stability.  
• Foster open conversations about wealth planning and family dynamics to ensure smooth wealth transfer and proactive estate management across generations.  
  
  
  

  Historical and Social Context of Wealth Inequality 

  History of Wealth Inequality in the United States 

  In the current United States culture, wealth inequality is quite the hot topic. We are constantly being shown the lifestyles of the rich and wealthy as aspirational content. We know the names of billionaires who have amassed large fortunes from being the largest online shopping center, or from their innovation in the auto industry. We hold these people in the highest regard in our society and are told that if we continue to work hard, we will maybe one day attain the level of wealth that they have. However, one of the most crucial factors to the success of these billionaires is access to generational wealth. 

  The access to generational wealth and a privileged background allows for the creation of even more amounts of wealth.  Having access to wealth allows one to take bigger risks, fail upwards, and have access to essential connections for even more wealth creating opportunities. 

  In our society, we are aware of the wealth inequalities that exist among us as the wealthy continue to grow larger and larger each year. According to a 2020 Pew Research study 61% of Americans say there is too much economic inequality in the country. While we are aware and feel the effects of the current state of wealth inequality, it is important to understand the historical context of wealth inequality, and how the wealth gap has continued, and will continue, to grow larger. 

  In the early America/Colonial era, wealth was accumulated via land ownership, agriculture, and trade. Wealthy European landowners were able to accumulate wealth through stolen indigenous lands, where raw materials and agricultural goods were exported, along with free labor to tend to the land and farms via the Transatlantic Slave Trade. Wealth inequalities during this time were beginning to be established. Some families with long legacies of generational wealth can trace their family’s beginnings to this period. 

  After the colonial era of the 1700s, the Industrial Revolution followed in the United States. The Industrial Revolution, which began around 1760 and lasted until 1840, was a significant catalyst for wealth inequality in the U.S. During this time, there was a shift to modernization and the introduction of machinery to the workforce to simplify and replace certain work that was done by hand, ultimately maximizing productivity. While this led to many positives for the workforce, it also serves as a perfect example of how wealth inequality comes to be. 

  While factory owners and those who owned the means of production were able to accumulate substantial amounts of wealth, others were not so fortunate. Factory workers were competing for low wages, working long hours, and were often forced to migrate to cities in search of employment. Industrialization allowed business and factory owners to reap large profits, all while keeping wages as low as possible, thus widening the divide between the rich and poor. 

  Industrialization also created the need for specialized workers who learned various skills, such as operating machinery. This need for skilled labor led to the creation of higher-paying specialized jobs, which contributed to the growth of the middle class. However, while the formation of the middle class created some economic growth, it was not enough to close the gap between the rich and poor laborers. 

  Even during economic turmoil, such as the Great Depression, the inequalities between the rich and poor grew wider. In fact, during the Great Depression, the rich accounted for at least one-third of all wealth, while the poor had little to no savings at all. While some families did lose their fortunes, the rich remained rich, while most Americans struggled to feed their families. 

  The federal government imposes taxes on inheritances through the federal estate tax, which applies to estates exceeding a certain value. While the federal government does not charge an inheritance tax under a certain dollar amount, a few states do impose inheritance taxes at the state level. However, the majority of inheritances in the U.S. fall below the threshold for incurring these taxes.  

  In the present day, wealth inequality is continuing to grow due to technological advancements, globalization, and even the COVID-19 pandemic has worsened the wealth inequality issue. According to the World Economic Forum, the top 10% richest people in the world own 76% of the world’s wealth as of 2021. While many lost their jobs and homes during the beginning of the pandemic, many companies and online retailers have seen record profits. 

  Race, Gender, and the Racial Wealth Gap in Generational Wealth 

  While we have discussed the historical context of wealth inequality in the United States, it’s important to discuss the systemic inequalities amongst different races, and the disparity between genders and wealth. Racism, sexism, and other structural systems of power that uphold one group of people over others have an impact on the oppressed group of people’s ability to gain wealth. 

  In 2023, the Pew Research Center released a study on wealth inequality between different races and ethnic groups, revealing stark differences between groups. According to the study, in 2021, the typical white household had 9.2 times as much times as much wealth compared to Black households, and 5.1 times as much as Hispanic households. The median household wealth for white households is about $250,400 while the median wealth for Black households is $27,100. And according to 2021 Census data, white householders were more likely to have equity in homes, own stock and mutual funds, and other asset building accounts. The 2023 census data reports that 73% of homeowners were white non-Hispanics, 10% of owners were Hispanic, and less than 8% were Black. 

  While data illustrates the wealth inequality between white and people of color, it is important to understand the historical context that existed to create and further this divide. 

  As previously mentioned, the colonial era of the United States relied on the exploitation of African slaves for free labor.  African slaves and their descendants were barred from being landholders and given no compensation for their labor. Oppressive laws and policies throughout history allowed discriminatory practices that prohibited Black and people of color from owning homes, getting certain job, denied education, and other wealth creating opportunities. 

  Even when African Americans eventually did gain the right to purchase property, discriminatory practices such as redlining, which was the practice of denying loans to those who lived in lower income and areas that were predominately Black- even to those who were qualified, prevented people of color from obtaining home loans. 

  The effects of history are still felt today. The lack of long-standing generational wealth in communities of color is a large factor affecting generational wealth today. Many communities of color are experiencing generational wealth for the first time in the form of some cash assets businesses, but mostly from inherited property. Many people of color are now creating wealth for the very first time, to be given to the next generation. 

  While it is difficult to create generational wealth without previous wealth, the rate of property ownership and wealth growth is increasing slowly over time for people of color, however, the wealth gap between white and people of color continues to grow. The effects of earlier laws and systemic racism are still felt today, along with barriers to access wealth building tools that still disproportionally affect people of color. There are great strides that have been made but still work to be done to close the gap. 

  A startling statistic reveals that 90% of wealthy families lose their wealth by the third generation. This loss is largely attributed to a lack of education and discussion around money management within families, which necessitates breaking the cycle to ensure better financial stewardship for future generations. 

  Gender also has an impact on generational wealth. Similar structural inequalities that affect generational wealth have impacted women historically and have contributed to wealth inequalities among genders. Structural sexism has historically prohibited women from owning bank accounts, allowed for unequal pay, prevented access to education, and other systemic barriers. 

  According to 2021 census data, the median earnings for men was $60,775, while it was $49,532 for women. With all the strides made in women’s advancement, women still earn less income overall than men, are still a minority of business owners, and struggle to generate generational wealth outside of marriage. Households where women are the head of household report lower amounts of wealth as opposed to households headed by men. 

  Best Practices

  • Advocate for policies that promote wealth equality, including affordable housing, equitable access to education, and reforms that address historical discrimination.  
  • Support initiatives that increase financial literacy and access to wealth-building opportunities, particularly in underserved communities of color and among women.  
  • Encourage open discussions about the impact of systemic racism and sexism on wealth inequality, fostering understanding and collaboration to drive social change.  
    
    
    

    Strategies for Building Generational Wealth

    Investments and Generational Wealth 

    There are many ways of creating generational wealth, some more accessible than others. One way that a person can begin to create generational wealth is through investing.  Investing in the simplest terms is a commitment of resources now to achieve a larger benefit later. Investments are typically thought of as monetary investments into things such as stocks and bonds but can also include investments into oneself to increase generational wealth. In this section, we will discuss how investing in education, stocks and bonds, and real estate can all help create generational wealth.   

    In the United States, there is a direct correlation between levels of education and income. Typically, the more education one receives, the higher the levels of income one can earn increase as well. A 2024 report from the United States Bureau of Labor Statistics noted that those with a master’s degree had median usual weekly earnings of $1,737 compared to $899 for those with only high school diplomas.   

    Education is considered an investment because unfortunately, it is not without a significant upfront cost. Higher education is a cost that is increasing each year, with the average in-state tuition for a public 4-year university costing approximately $11,000 a year. Higher education can be financed with student loans, savings and out-of-pocket payment, scholarships, and grants.   

    Consider opening savings accounts specifically for education that beneficiaries can use to pay for their education and continue the cycle of generational wealth! Whether you are investing in your own advancement, or preparing for the next generation, education is a high yield investment.   

    Investing in the market is a great way to build generational wealth and does not have to be high risk or complex if you start small and start early. Financial investments such as stocks and bonds build compounding interest over time which makes them attractive for building generational wealth because of the long-term benefits.   

    Compounding interest, simply put, is the interest gained upon interest. For example, someone saving money with a high yield savings account as opposed to a traditional savings account will gain more funds over time because of compounding interest. Investing in stocks and bonds can also yield compounding interest as well.   

    Investing in the stock market can be intimidating, so one easy place to start is by investing in a 401k or any other retirement account. Retirement accounts are often provided as a benefit offered by employers, with some employers even matching contributions up to a certain amount. Keep in mind that the stock market is subject to volatility and can be quite unpredictable. If you are considering making financial investments, consider working with a financial advisor or contacting your financial institution for more resources and aid.  

    Real Estate and Generational Wealth 

    When it comes to generational wealth, the first thing that typically comes to mind is homeownership. According to the Urban Institute, homeownership is the main way people build wealth in the United States. Yet in 2018, the Black-white homeownership gap reached 30.5 percentage points, its highest level in 50 years.  

    In addition to real estate, family businesses play a crucial role in contributing to generational wealth. These businesses, along with other investments, are significant elements in conversations about economic disparities and wealth concentration in society. 

    Homeownership is a huge desire for many Americans, specifically for the purpose of creating and passing down generational wealth. Wealth by homeownership is considered one of the more attainable ways of creating generational wealth and is often associated with the “American Dream.” 

    However, many people today feel as if homeownership may be out of reach due to high housing costs, stagnant wages, struggling housing markets, and other factors currently impacting homeownership. Despite these challenges, homeownership remains a large desire and motivator for many Americans. 

    Purchasing and maintaining a home allows for the home to accrue equity, which is the key to generational wealth through homeownership. Equity is the difference between the amount owed on a home and the home’s value. For example, a person with a home worth $200,000 and a mortgage balance of $50,000 will have home equity of $150,000. 

    Once someone has home equity, they can allow it to grow, convert it to cash if needed, or borrow against it using tools like home equity loans or lines of credit. If equity is left to grow, homeownership becomes one of the best assets to pass down intergenerationally. 

    As a home is passed down, the mortgage balance typically decreases over time until the home is fully paid off. At that point, the beneficiary inherits the home and its equity. They can then choose to sell the home for its maximum value or maintain it and continue passing it down, perpetuating the cycle of generational wealth. 

    Additionally, an heir to a property benefits from lower housing costs, freeing up funds to invest in other wealth-building opportunities. 

    Homeownership remains one of the best ways to create generational wealth and should be made more equitable and attainable so all Americans can achieve their version of the American Dream. 

     Best Practices

    • Start investing in your education by saving for tuition or exploring scholarships and grants to make higher education more affordable.  
    • Begin investing in stocks, bonds, or retirement accounts like a 401k, and consider working with a financial advisor to maximize your investments over time.  
    • Explore options for homeownership and begin building equity, even if it requires navigating current housing challenges or seeking down payment assistance programs.  
      
      
      

      Future Generations and Moving Toward Equity

      The Importance of Teaching Financial Literacy and Financial Education

      Financial literacy is the understanding of financial skills and concepts that lead to healthy personal finances. It encompasses systems such as bank accounts, credit scores, budgeting, investing, debt, and savings. It allows one to build a better relationship with money, manage debt, and build healthy financial habits that can be taught to the next generation.   

      Those with more financial education are more likely to take on smaller amounts of debt and manage debt responsibly. They are also less likely to make risky investment moves, more likely to save, and overall practice good personal finance habits.  

      Without financial literacy, one may be more likely to take on high levels of debt, may not be aware of the best strategies for debt repayment, and may struggle with savings. There could also be uncertainty around investments, leading to more high-risk decisions. Financial literacy can make a stark difference in creating generational wealth, especially for those creating generational wealth for the first time.  

      As with other systemic barriers, financial literacy has been a significant obstacle for marginalized groups, with limited access to financial education. As generational wealth is passed down, financial literacy is also passed down. Many people describe their relationship with money and personal finance as something passed down from their parents and families.  

      However, discussions about finances are not always had among families, especially those from lower-income backgrounds due to the stigma associated with finances. The lack of financial literacy from earlier generations can be a hindrance to the next generation, who are not inheriting those learned personal finance skills.  

      Fortunately, financial literacy is becoming increasingly accessible with the vast amount of financial education available online and through social media. Financial institutions are investing in financial literacy for their communities, nonprofit organizations are dedicated to providing financial education, and there are many other resources that can be utilized. Financial literacy is slowly becoming more accessible for all, which will increase generational wealth.  

      Once you have learned the skills and know what options are available to you for wealth building, you are more likely to act on those skills, use the tools available to you, and begin building wealth for yourself and the generations to come.  

      Systemic Changes in Addressing Wealth Inequality 

      Wealth inequality is largely a systemic issue, and while personal finance can influence generational wealth for someone, it is not enough to close the gap and shift wealth to a more equitable place. Systemic changes are needed to address wealth inequality, distribute wealth more fairly, address barriers to wealth creation that harm marginalized groups, and overall bring equity to society. 

      Some strides in society have been made to allow for those who may not have previously had access to generational wealth to begin to build wealth now and for years to come. For example, state and city programs such as first-time homebuyer programs allow those with lower incomes to have access to home buying in the form of downpayment assistance or other financial aid. 

      Some local organizations, financial institutions, and even some community groups such as churches or nonprofit organizations are providing financial literacy courses to the communities they serve, increasing financial literacy and alleviating some personal finance stress. National organizations, such as Habitat for Humanity, offer home buying programs specifically for those who are mid- to low-income, making homeownership more attainable. 

      Inheritance taxes also play a significant role in wealth transfer, as inheritances are subject to taxation under federal and state laws, affecting the amount of wealth that can be passed down to beneficiaries. 

      Various grants and scholarship programs for minority business owners are becoming more prevalent to help level the playing field. These programs are helping to bridge wealth gaps for marginalized communities and build wealth for individuals to continue to pass down and grow. 

      While these are notable changes, larger systemic changes need to be implemented in society to allow wealth advancement for all. Financial literacy and education should be in schools to ensure everyone receives financial education before adulthood. Policies should be passed to promote affordable housing and more accessible homeownership. Employers should ensure fair wages for all and adequate benefits for all employees. 

      We have a long way to go in addressing wealth inequality. Gaining financial literacy and starting soon, even small steps, can help you begin to accumulate wealth for yourself and generations to come. 

       Best Practices

      • Invest in your financial education by exploring online resources, attending workshops, or reading about personal finance to build strong money management skills.  
      • Take advantage of local and national programs that offer financial assistance, homeownership opportunities, and grants to help build wealth and overcome systemic barriers.  
      • Advocate for policies that promote equitable access to financial education, affordable housing, and fair wages to help address the larger systemic issues contributing to wealth inequality.  
        
        This article is shared by our partners at GreenPath Financial Wellness, a trusted national non-profit.