One in three Americans who inherit wealth will squander it. If they somehow manage to keep some of that wealth and leave it to their children, those children will likely blow away the money. Only a few wealthy families know how to preserve their wealth from one generation to another.
A study by the U.S. Trust reveals the reasons for this. This survey of high-net-worth individuals with upwards of $3 million in assets showed that 78% of them felt their future heirs were incapable of handling the inheritance. Still, over 64% rarely discussed their wealth with their children.
The result is, since the subject of wealth was not discussed, the children of these wealthy people didn’t know anything about how to manage money. On average, people who inherit wealth will buy a new car 19 days after and finally go broke in a few short years.
These facts should concern you if you invest time and energy to build your wealth. These wealthy people’s experiences could easily become your story if you do not take the steps today to avoid the mistakes they made.
Why inherited wealth doesn’t last
The reasons inherited wealth doesn’t last are also why most people misuse a large portion of the money they earn throughout their lifetime.
- Wealthy parents often transfer their wealth to their children but fail to share the financial know-how to create wealth. The children get money, not financial literacy.
- These children don’t have the guidance of professional wealth managers to oversee their use of inherited wealth. As a result, they are left to learn by trial and error.
Why do some wealthy families succeed while others fail
On the other hand, there are families whose names have become synonymous with wealth because they have learned the secrets of generational wealth. For some of them, hundreds of years after the originator of the family fortune, the family wealth only grows bigger.
What are the secrets of these families?
1. They create a generational wealth plan.
The plan for managing the family fortune is designed without the wealth originator in mind. It features various levels of shared decision-making that ensure the involvement of all family members. This makes the family more financially responsible.
2. They appoint impartial trustees
A lot can go wrong between when a person inherits money and when they learn to manage it. Feuds between family members can also harm the family fortune. A neutral third-party p4rotects the family wealth from these dangers.
3. They invest in assets that grow across multiple generations
They take a long-term view of their investment decisions by choosing assets that keep growing despite political or economic upheavals. Most families with generation wealth make real estate a pillar of their wealth. How do they use real estate to achieve these impressive results?
Tips for building generational wealth through real estate investing
Building generational wealth with real estate can be as simple as owning ten houses, all paid-off, worth $300,000 each. What would it do for your children and grandchildren if you could leave this kind of inheritance to them? Here are tips to help you achieve that exact result.
1. Aim for portfolio diversity
The right mix of commercial and multifamily dwellings will help you create a portfolio with a high potential for income and appreciation but low risk. There are two ways to do this; by geography and asset class. While diversifying, try to avoid high-risk assets like hotels or lodging properties.
A reliable property manager is key to making your real estate investments truly passive. Without a property manager, you must oversee the operations and maintenance of the buildings yourself. This is not the way to build generational wealth since you can only manage so many houses.
3. Pay attention to cash flow and capital gain
Reliable cash flow is essential. Buy properties in locations where there will be a constant demand for the property by tenants. Look for areas with high rent and good prospects for appreciation. This may mean buying more expensive properties, but it will pay off in the long run.
4. Look for emerging opportunities
With every good or bad event, new opportunities will emerge for those who can see them. Currently, the e-commerce boom, partly helped by the Coronavirus pandemic, has led to opportunities in properties for warehousing, supply chain management, and logistics.
5. Shelter capital gain
For instance, investing in economically distressed communities is one way to shelter capital gains on your property. Look for locations and asset classes that offer tax benefits, such as deferral of capital gains. These will help you lock in the property’s value for your heirs.
6. Employ gifting strategies
Taxes can be a huge issue when you transfer your assets to your children. Every time a property is transferred to another person without exchange of money, it is a taxable gift in the eyes of the IRS. There are ways to avoid this if you think of it beforehand.
We are pledged to the letter and spirit of U.S. policy for the achievement of equal housing opportunity throughout the Nation. See Equal Housing Opportunity Statement for more information.