2 Steps You Can Take to Start Building Generational Wealth - Business Insider

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martin a. scott smiles and wears a navy blue suit and tie and stands in front of a gray background — The author, financial planner Martin A. Scott.

As a financial planner, I've seen the term "generational wealth" rise in popularity in recent years.
To build generational wealth, I recommend choosing the right life insurance policy to pass on funds.
I also recommend having a full estate plan in place to ensure your assets end up in the right hands.
Read more stories from Personal Finance Insider.

The term "generational wealth" has become widely used in recent years, but what is it and how does one start to build it? Like many other things in life, the definition depends on each individual. One person might think generational wealth means leaving a substantial amount of money in a trust account to heirs, whereas another could define it as providing financial flexibility to heirs by leaving a house that is mortgage-free. One person might leave a sustainable business for their heirs to operate or sell, whereas another individual could focus on helping their adult children pay for major expenses in their life (e.g, a wedding, down payment on a home, seed money to become an entrepreneur, etc.).

Regardless of how a person defines it, there are ways to achieve this goal. This article provides two steps that someone can take to start on a path to building generational wealth. Depending on the person, each one of these areas could range from being relatively simple to extremely complex. For the purposes of this article, I will focus on the basics and provide examples of how setting this foundation can effectively lead to the ultimate goal of generational wealth.

1. Securing the right life insurance

Plain and simple, life insurance (when structured properly and appropriately for the individual) is a great financial tool that can be a catalyst for generational wealth-building. Discussing how much and what type of life insurance is not the purpose of this article. The goal here is to show how valuable life insurance can be within any financial plan. Take the following two examples.

Life insurance to cover college tuition

Mike and Sarah both are doing well in their careers, but neither one of them grew up in households that had much money. They got married three years ago and just had a son named Jack this year. Upon the recommendation of their financial planner, they both purchased life insurance policies worth relatively high amounts. This decision was made to make sure there would be adequate financial capital available to provide for their son's upbringing (which includes college tuition) in the event one of them dies prematurely.

Unfortunately, Mike faces some serious health issues and dies. Sarah is devastated, but throughout her grieving process, she does not have any financial concerns as Mike's life insurance policy provides much money to her. In the event of one of their deaths, the plan was to use a portion of the life insurance to establish an account specifically to fund Jack's future college tuition. Sarah knows that generational wealth-building has started for Jack as he will not be burdened with student loans in the future, which will provide him much more financial flexibility to grow his own wealth.

Life insurance to start a business

John and Mary have been married for over 50 years. They have two adult children and five grandchildren. They faced difficult times with finances throughout their lives, but did make it a priority to have life insurance since they wanted to do something financially impactful for each of their grandchildren.

Sadly, John dies after battling an illness for years. His grandchildren were the beneficiaries of his life insurance policy and each received a portion of the death benefit. Barbara, one of his grandchildren, has always wanted to become an entrepreneur, but never felt like she had the financial flexibility to do so. Upon receiving the money from John's life insurance policy, Barbara used it all as seed money for her business, which she knows will be very successful and will also provide her the opportunity to create generational wealth.

2. Proper estate planning

I believe it is prudent for people to consult with an estate-planning attorney to at least establish the basic documentation, which includes a will, living will, and power of attorney. Regarding generational wealth, having a properly executed will in place is very important because it coordinates how your assets are distributed after death. Using a will adds effectiveness to the transfer of specific assets to the next generation. In other words, the assets will get to the person or people per the decedent's wishes. Take the following example.

Harry never got married and has no children, but he accumulated a substantial amount of wealth throughout his lifetime. In an effort to provide financial flexibility to his nephew, Larry, he would like to give him a house, which is completely paid off. Harry executed his will stating that upon his death, Larry will now be the owner of the house. As a result, Larry will have the opportunity to live somewhere and not have to pay for a mortgage, which ultimately frees money up for him to create generational wealth.

Martin A. Scott

Martin A. Scott, CFP, is the founder and financial planner of Lasting Wealth Principles, a fee-only comprehensive financial planning firm dedicated to helping married couples and working professionals in their 30s and 40s reach their financial goals and dreams. Martin has a passion for helping others become more knowledgeable about money. His commitment to being a lifelong learner of financial planning knowledge and getting involved in the profession is shown by his active memberships in the Association of African American Financial Advisors (AAAA), XY Planning Network (XYPN), National Association of Personal Financial Advisors (NAPFA), and Financial Planning Association (FPA) of New Jersey. Martin is a Certified Financial Planner professional who holds a BS from Cornell University and an MBA from Seton Hall University. Connect with Martin on LinkedIn.