Everyone Wants to Create Generational Wealth, but What Does That Actually Mean

In discussions about building a financial legacy, the words “generational wealth” have become almost meaningless. This term has morphed into a buzzword that is casually tossed around in conversations ranging from estate planning, meme stock investments and cryptocurrencies, to the purchase of real estate or insurance.

But beyond the allure of long-lasting riches, what does creating generational wealth truly entail? At its core, generational wealth refers to assets being passed down from one generation to the next, ensuring financial security and providing opportunities within families. However, generational wealth is not entirely about money or financial assets; it also includes intangible assets such as education and professional networks.

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The intangibles provide pathways for younger generations to build the knowledge and skills necessary to achieve some semblance of success on their own. And over time, they are able to fuse their own professional networks and connections with the financial resources they have inherited and leverage this union into more lucrative opportunities for the generations that follow.

The key characteristic of generational wealth is its capacity to outlive the first generation. For example, consider a family business that not only provides income but also fosters a legacy of entrepreneurship. This enterprise becomes a source of both economic value and cultural identity for the family. And ultimately, whether the business generates enough excess cash flow beyond the income needs of its founders or not, its true value lies in the life lessons and hands-on experiences that can be learned and passed down between future generations.

One of the most obvious steps in preserving a family’s wealth for future generations is estate planning. This process involves setting up legal frameworks like trusts and wills to ensure assets are distributed accordingly while minimizing tax liabilities and (hopefully) family disputes.

A well-crafted estate plan should also include provisions for who is able to access assets and at which milestones. That is perhaps the easiest part. It is almost pointless to spend the time and money preparing assets for your heirs if you never take the time or spend the money to prepare your heirs for the assets.

Consider the tales of the Rockefeller and Vanderbilt families and how both stories played out in stark contrast with one another. One serves as a case study in how to properly plan for and effectively sustain generational wealth, while the other should be considered a precaution about the potential misfortunes of failing to prepare heirs for their future inheritance.

On one hand, the Rockefeller family—led by John D. Rockefeller, the founder of Standard Oil and arguably the wealthiest person in modern history—set a gold standard in wealth preservation through generations. From the outset, Rockefeller was acutely aware of the importance of not just accumulating wealth but ensuring its sustainability by diversifying it.

The family's investments spanned across various sectors, including iconic real estate landmarks such as Rockefeller Center in New York City and large tracts of land that were later donated for conservation. These tangible assets provided a stable and appreciating store of value that contributed to the family's enduring wealth through multiple recessions and stock market crashes.

John D. Rockefeller’s knack for diversification was also paired with a strong emphasis on family governance and education. They held regular family meetings and established committees to oversee different aspects of the family’s wealth and philanthropic efforts. Even the youngest members of the family were required to attend so that they could be educated about their financial heritage and future responsibilities.

To protect their wealth from potential mismanagement and ensure its smooth transfer across generations, the Rockefellers established various trusts and legal structures, some of which still exist today. This structured approach to wealth management and financial education ensured that their wealth was not only preserved but continued to grow, which has helped to maintain the family's affluence and societal impact to this day.

Conversely, the Vanderbilt family—whose patriarch Cornelius Vanderbilt amassed immense wealth from shipping and railroads during the 19th century—presents a cautionary tale. When Vanderbilt died in 1877, his net worth was estimated to be around $100 million (approximately $2.8 billion in today’s dollars), making him one of the richest men of his time.

However, despite having 13 children, Cornelius Vanderbilt left the bulk of his fortune to his eldest son William Henry Vanderbilt with the expectation that this move would help consolidate the family’s wealth and maintain their empire. Instead, the disparity in shares between his wife and remaining children was a lasting source of tension between the family. Some of Vanderbilt’s children even contested the will, leading to legal battles that further strained familial relations and ultimately drained resources.

Despite being one of the wealthiest families in American history, the Vanderbilt fortune dwindled over the decades. Vanderbilt’s descendants lived lavish lifestyles, and the fortune was fought over and split among many heirs. Each generation is believed to have spent more than the last, without adequate reinvestment into income-generating assets.

By the mid-20th century, much of the Vanderbilt family’s wealth had evaporated. Most notably, when 120 Vanderbilt family members gathered for a reunion in 1973, not one of them was a millionaire. The Vanderbilt story illustrates that without strategic investment, financial education, and thoughtful planning, even the largest fortunes can be depleted.

While most Americans will not amass the wealth that requires the sophisticated level of planning necessary to protect the fortunes of the Rockefellers or the Vanderbilts, it is still imperative to consider the financial education of your heirs to be equally as important as the words within the pages of any will or trust.

For instance, if your children receive a lump sum payment from a life insurance policy, are you confident that your grandchildren will ever see a dollar of it? What good is dumping hundreds of thousands or even millions of dollars into the hands of people you care about without any instructions or guidance on how to make the most of that newfound wealth?

Though the desire to build generational wealth in the traditional sense is certainly a goal worth pursuing, it is important to consider that the conversation must stretch beyond financial assets. Perhaps some of those dollars your heirs stand to inherit would be better spent helping them improve their financial intelligence today.

While the term “generational wealth” represents an ideal, achieving it requires crafting an intricate plan that is a balance of both economic and social factors. For those who aspire to build such a legacy, it is critical to understand that financial assets will prove meaningless without the inherited wisdom to go along with them. 

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Malcolm Ethridge, CFP® is the Managing Partner of Capital Area Planning Group based in Washington, DC. He is also the Managing Partner of Capital Area Tax Consultants. 

Malcolm’s areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits. 

 Disclosures:

The information provided is for educational and informational purposes only, does not constitute investment advice, and should not be relied upon as such. Be sure to consult with your legal advisors before taking any action that could have tax and legal consequences.

Investments in securities and insurance products are:

NOT FDIC-INSURED | NOT BANK-GUARANTEED | MAY LOSE VALUE