What is Generational Wealth Transfer and How Does it Work

Many people can only dream of having their parents pass some asset down to them. For them, this is a privilege most people do not have. Who definitely do have it are members of the 0.1% of the world’s population.

This ultra-rich is composed of billionaires who have generated fortunes. Experts are anticipating the Great Wealth Transfer, which is bound to happen with the passing of baby boomers who are billionaires. We’re talking about trillions of dollars – $68T to be exact.

With the tremendous amount of assets that will be passed down through the upcoming generational wealth transfer, you might be wondering what exactly it is, how works, and what its impact would be. Here’s what you need to know. 

What is Generational Wealth Transfer and How Does it Work

Understanding Generational Wealth Transfer

First, it is essential to understand what the term ‘generational wealth’ refers to. Generational wealth is fortunes owned by a member of the family, usually parents or grandparents, which can be inherited by their children or grandchildren. 

It is also referred to as a family, multigenerational, or legacy wealth. These estates can come in the form of stocks, real estate, businesses, or other possessions that have a monetary value. So, you can quickly gather that generational wealth transfer is the act of passing down such fortunes from one generation to another.

How Wealth is Transferred Through Generations

Whether you are a member of the 0.1% or your parents have a modest estate you can inherit, you might be wondering how exactly such assets can be transferred to you. There are different ways of doing so, and it does not always involve death.

What people commonly know is that upon the death of owners, they can assign portions of the estate to their inheritors through wealth transfer planning strategies such as writing a will, life insurances, trusts, and estate planning. 

These are tax-efficient ways to transfer riches through estate tax exemptions. This means that assets within the exempted value (more than $11M for individuals and $22M for couples) will not pay any taxes for such transfers.

However, what many people do not know is that generational wealth can be transferred to an heir even while the owner is alive through gifting. This type of transfer is subject to gift taxes with the same limits as estate taxes. 

Positive Impact of Generational Wealth Transfer

For ordinary individuals with generational wealth, such transfers mean that they will be able to get their hands on the estates their parents or grandparents left to them. If a person is given a residential property, this gives them an option to no longer worry about mortgages or rent.

Other types of assets, such as money and stocks left to them, can be used to generate more wealth. So, over time, this transfer can improve the economic lives of the recipient. If they have been living paycheck to paycheck in the past, this newly acquired wealth can help them alleviate their financial situation. 

They can save money and only use their paycheck for day-to-day living, or they can build a business or invest the money to generate more. In the context of the Great Wealth Transfer in which the super-rich passes down their fortunes, experts expect much of these assets to be fluid. This means that they can be acquired by buyers which can be a good thing as it can stimulate the economy.

What is Generational Wealth Transfer and How Does it Work

The Bottom Line

While individuals can find a way not to pay taxes which could be used to fund government initiatives, generational wealth transfer offers a positive impact both for recipients of modest assets or those receiving exorbitant legacy wealth.