Generational Wealth Plans Aren't Just for Rich People

An older woman and a younger women look at a laptop together at a table. — (Image credit: Getty Images)

The idea of the American Dream has motivated people in this country for generations, but with each passing generation, that dream becomes further out of reach. While income is increasing, inflation is outpacing wages, causing younger generations to fall behind when saving for long-term goals such as retirement.

Take Gen Z, for example (loosely, those born between 1997 and 2012), and compare their expenses to what Millennials (those born between 1981 and 1996) were spending just over a decade ago. According to The Washinton Post, Gen Z is spending 31% more than Millennials on housing, 46% more on health insurance and more than double on car insurance.

They are more likely to go to college and make more money than Millennials at the same age, but according to BestColleges, they are also accumulating student loans at an alarming rate. Older generations may point the finger at younger generations for spending frivolously or not working hard enough, but the fact of the matter is everything costs more, and wages aren’t keeping up with expenses.

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That’s where the importance of generational wealth comes in. It’s more than just multimillionaires passing money on to the next generation — it’s giving today’s youth the help they need to succeed. However, a recent study by Northwestern Mutual found that only a quarter of Americans expect to leave an inheritance. Of that group, two-thirds called it one of their most important family goals.

I feel the same way. My family’s motto is “Always Forward,” and I feel obligated to create a better financial future for my family, just like my grandparents did for me.

Why think about generational wealth now?

A common misconception is that you need to have millions of dollars to leave behind an inheritance. You don’t. You may just have a few assets, such as a home, a retirement account and other possessions. Another myth is that retirees must sacrifice their hard-earned retirement dollars to create generational wealth. In fact, we tell our clients to “have a ball, spend it all” and encourage them to create memories with their families. However, it’s difficult to predict how long that “ball” will last. What happens if it ends before you expect it to?

Creating generational wealth is about building a well-thought-out plan for whatever assets you have and considering all the pieces of the puzzle to create efficiency and effectiveness with your finances.

There are a few things you should be thinking about as you start to build a plan for generational wealth:

Pass on financial wisdom

I’m driven to honor my relatives’ sacrifices and create financial stability for the next generation. That obligation isn’t just about wealth — it’s also about wisdom.

Leaving behind an inheritance does not ensure it will be managed properly. Research has shown that 70% of wealthy families will lose their wealth by the second generation, and 90% will lose it by the third generation. Another study showed only 42% of adults who expect to receive an inheritance feel very comfortable managing their new money. A lack of proper planning means loved ones may not get the most out of their inheritance.

The bulk of wisdom comes through experience, and no one understands that more than retirees. The clients we work with who are nearing retirement understand planning pitfalls, the importance of saving early and navigating the financial challenges in life. Having regular conversations with your grandkids about managing money can help them avoid the same mistakes you made.

By teaching the next generation proper financial literacy, not only could you guide them to a stable financial future, but you’ll give them a chance to leave behind a better future for their children.

Build an estate plan

An estate plan can help you spell out your final health care wishes and protect your estate. The most important part of an estate plan is creating a will, which determines who gets which assets when you die. Yet, fewer than one-third of adults have one.

Beyond creating a will, an estate plan includes steps like updating beneficiaries on your retirement accounts, establishing gifting to charitable and nonprofit organizations, spelling out your final health care wishes and determining powers of attorney to make decisions if you cannot.

A proper estate plan is the first step to ensure your generational wealth ends up in the right hands. Without one, there’s no guarantee your plan to pass down assets will be executed. Consider talking with a financial professional to help you plan your estate.

Be tax-efficient

Having a well-established plan means there are likely to be assets left after death. While there isn’t a federal inheritance tax on amounts below $13.99 million, there are taxes on the sale of inherited assets or income from an inherited pre-tax retirement account. Before we get to that point, there are proactive estate planning strategies you can implement to help mitigate these taxes and maximize the inheritance left behind.

One of the biggest things to be cautious of: what type of assets are left behind for the family. The SECURE 2.0 Act made it easier for people to save for retirement in many ways, but it also required non-spousal beneficiaries to withdraw the entire amount in an inherited IRA within 10 years of the owner’s passing. Any amount withdrawn in a pre-tax account, like a traditional IRA, is treated like income and adds to their tax bill.

For example, if you leave $1 million in a pre-tax IRA as an inheritance, the beneficiary would be forced to withdraw an average of $100,000 each year across 10 years, increasing their income and tax bill. Suppose you prioritize spending the amount in an IRA while alive and put accounts without such restrictions in the inheritance, like a Roth IRA or real estate assets. In that case, you will reduce your loved one’s tax liability.

Another strategy is to gift your loved ones money while you’re alive. Each year, you can donate a certain amount of money to as many people as you like without incurring taxes. In 2025, the gift tax exclusion is $19,000 for individuals and $38,000 for married couples. This means grandparents can give each grandchild up to $38,000 without paying taxes on the gifts. This is an efficient way to mitigate the taxes owed on the inheritance.

Adjust your plan regularly

Whether you leave behind $10,000 or $1 million, proactive planning can provide your loved ones financial security in an ever-changing economy. However, your financial plan isn’t something you should set and forget. It should change as you change, adapting to every season of your life. A financial professional can make strategic adjustments as needed to help you keep moving toward your goals. You can still live the retirement you deserve — and your loved ones can continue working toward theirs.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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As the founder and CEO of Momentum Wealth, Nico Pesci is passionate about creating efficient retirement plans and helping clients adapt to volatile economic environments. After watching his parents struggle to keep their retirement savings during the 2008 financial crisis, Nico founded Momentum Wealth to help people like his parents build the confidence they need to enjoy the retirement they deserve.