Generational wealth is wealth that gets transferred from one generation of a family to the next. It may consist of valuable assets such as cash, real estate, securities or ownership of a family business. Generational wealth may also take the form of education, contacts, ability to take greater risks and lucrative employment within a family business. It can occur on the death of a parent or other family member, or during the life of both people. While many households can expect to receive some sort of generational wealth, a small number of transfers within wealthy families accounts for a majority of the total value of generational wealth transfers.
Consider working with a financial advisor as you create or update your estate plan.
The so-called Great Wealth Transfer is underway. More than 10,000 baby boomers are turning 65 every day, and over the next 20 to 30 years trillions of dollars’ worth of wealth will transfer to their children. It will cause some changes for everyone.
Scope of Generational Wealth Transfer
The average value of generational wealth transfers as measured by the Federal Reserve comes to $350 billion per year. In a typical year, about 2 million households get either inheritances or sizeable gifts, according to the Fed’s Survey of Consumer Finances.
Generational wealth transfers make up a large proportion of wealth for many households. Fed analysts estimated from approximately one quarter to one half of total wealth is accounted for by generational wealth transfers.
Recipients of Generational Wealth Transfer
Generational transfer is a significant source of wealth for households at all levels of wealth and income, providing similar proportions of the total wealth for people rich and poor. The Fed’s analysis suggested that this means that more attention to thrift and saving is not a likely explanation for why the wealthy are wealthy. Most generational wealth transferred goes to recipients who are already wealthy. Half of all inheritances are less than $50,000, and these small transfers make up only about 5% of all inheritances. Only about 2% of transfers are worth $1 million or more. However, these large transfers make up 40% of the dollars transferred.
The recipients of generational wealth transfers are more likely to be college-education and have higher incomes and more wealth than those who don’t get such gifts. This is especially true of those who receive inter vivos gifts from living grantors.
While generational wealth transfers typically go from parents to children, the beneficiaries are often well into middle age or older by the time they receive any cash or other assets. Inheritance, the most common sort of generational wealth transfer, peaks at about age 60. For inter vivos gifts transferred during the lives of giver and recipient, recipients are typically much younger, however. Most inter vivos recipients are in their mid-20s.
Kinds of Generational Wealth Transfer
People transfer wealth to succeeding generations using a variety of means. Some involve cash or other tangible assets, while others are intangible. They include:
- When parents or other benefactors die, the terms of their wills may transfer valuable assets such as cash, securities, real estate, collectibles and art to offspring or other beneficiaries.
- Inter vivos. These gifts occur while both giver and recipient are still living. They are less common than inheritance as a means to transfer wealth across generations.
- One generation can transfer wealth to the next generation by providing high-quality primary education and by funding college. People who are able to graduate from college without student loans can begin building their own wealth sooner than those who are encumbered by college debt.
- Family business employment. Providing lucrative jobs at family-owned businesses is an important way families transfer wealth to younger generations.
- Access to networks of potential future employers, investors, mentors and other helpful individuals is another way being a member of a wealthy family can benefit someone and is, arguably, a form of generational wealth transfer.
- Financial literacy. Families can provide wealth-building benefits to later generations by seeing that heirs receive training in budgeting, saving, investing and other aspects of personal finance.
- Resume-building experiences. Generational wealth can also take the form of taking on family business responsibilities, serving on charitable boards and other experiences that enhance the career and income prospects of members of succeeding generations.
Effects of Generational Wealth Transfer
Having more money or other assets can give recipients of generational largesse significant advantages over those who don’t get help from previous generations, including some benefits that aren’t obvious on first glance, however. For instance, the insurance effect is the name given to the greater ability and willingness to take on risk shown by heirs to significant wealth.
When someone knows he or she can be bailed out by family money it’s easier to take the plunge to start a business or to make a risky investment with a potential high return. Given the powerful wealth-building effects of business ownership, the insurance effect can be a significant type of generational wealth transfer.
Not all generational wealth transfer effects are seen as positive. For instance, the slacker effect is the name given to the observed tendency of children of successful parents to be less energetic, driven and successful than their parents. This is presumably due, in part, to the fact that they know they don’t have to pursue success on their own.
Generational wealth transfer is wealth that moves by inheritance after death, gifts during life and other means from one generation to the next. It is an important component of household wealth and one that benefits millions of households in a typical year. Because wealthy families leave larger bequests, an outsized percentage of total wealth transfer occurs with a small number of affluent families.
Tips on Estate Planning
- The potential impact of generational wealth transfer makes it important to get good advice from a qualified advisor experienced in estate planning. Finding such an advisor doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors, get started now.
- Want to take a look at what your portfolio will look like in a decade? SmartAsset’s investment calculator can help you do just that. Enter how much you have invested, how much you’re contributing and what rate of return you expect. We’ll then show you your investment growth five, 10 or even 30 years into the future.
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