Generational wealth – assets passed down from one generation to another – has always been a hot topic. Some believe generational wealth is easily attainable while others argue it is rare. Confusion exists about how families actually build and maintain wealth over generations. In reality, there are several common myths and misconceptions about how generational wealth works. Let’s explore 5 of the biggest lies about building generational wealth.

1. Generational Wealth Just Happens Naturally Over Time

One common myth is that generational wealth just happens naturally if a family saves and invests over many decades and generations. The reality is that deliberate steps and strategies are required to preserve wealth and pass it on successfully. Accumulating assets is difficult, but maintaining wealth across generations is even harder.

Without proactive estate planning, communication, and wealth transfer strategies, family assets often get depleted rather than increasing over time. It takes more than just time and compound interest to foster generational wealth. Families must make wealth transfer and estate planning a priority if they want to pass down assets successfully. Relying on time alone usually leads to wealth dissipating by the third generation.

2. The Wealthy Always Pass On Assets To Their Heirs

Another misconception is that the wealthy inevitably pass on assets directly to their children and grandchildren. In reality, many high-net-worth families lose a substantial portion of their wealth by the second generation. By the third generation, up to 90% of family assets have been spent or lost.

Without proper wealth transfer strategies, a significant amount of wealth ends up going to taxes, estate fees, litigation between heirs, and poor money management by beneficiaries. Generational wealth does not just automatically flow directly from one generation to the next. Proper succession planning, communication, and wealth management are required to preserve assets within families long-term.

3. Financial Education Is All You Need To Create Generational Wealth

Some believe all that’s needed to foster generational wealth is teaching children good financial literacy and money management skills. However, financial education alone is usually insufficient. Of course, strong financial knowledge helps beneficiaries preserve wealth, but more is needed for families to maintain wealth across generations.

Communication, trust, values, and unity are just as essential as financial skills. A family enterprise with discord, detachment, and disputes will struggle to maintain wealth no matter how financially literate the heirs are. Teaching sound money management skills is one element, but families must also maintain shared vision, close relationships, trust, and communication to achieve multi-generational wealth.

4. Generational Wealth Means Never Selling Assets

A common myth is that families with generational wealth never sell core assets like a business or real estate. In reality, the most successful family enterprises do sell some assets over time. They realize a rigid, static portfolio can jeopardize longevity, so periodic buying, selling, or restructuring of assets is prudent.

Selling off certain assets allows families to diversify, pivot as markets change, realize gains for reinvesting, adjust ownership structures, and avoid squabbles between heirs. Intentionally holding onto every asset forever can actually jeopardize generational wealth. Savvy families realize strategic sales at certain points to bolster the continuity of wealth.

5. Generational Wealth Means Giving Heirs A Free Pass

Some believe generational wealth means letting heirs do whatever they want while living off a family fortune. In truth, the most successful family dynasties don’t take a hands-off approach to inheritors. They encourage motivation, education, stewardship, and purpose in heirs while monitoring wealth use. Generational wealth doesn’t just happen naturally. It requires proactive strategies centered on communication, succession planning, education, and governance to understand how to build generational wealth.

Healthy family enterprises utilize mechanisms like trust distributions, involved advisors, governance boards, and mission statements to provide oversight and stewardship. This ensures heirs utilize wealth responsibly to carry on the family legacy versus misusing assets or squandering capital. Establishing controls and guidance ensures heirs remain purposeful stewards of generational wealth.

To Wrap Up 

Dispelling common myths is the first step to building sustainable generational wealth. It requires knowledge and intention versus hoping time and compound interest will automatically maintain wealth. Families must open dialogues, implement estate plans, teach financial literacy, provide oversight, and maintain relationships. With proper structures, mindset, and communication, passing the torch successfully from one generation to the next is an achievable goal for any family dedicated to maintaining a legacy.