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What is generational wealth? And how to build it

Learn how generational wealth can provide long-term financial stability and create opportunities for future generations.

Updated

11 min. read

Generational wealth refers to assets and resources that are passed down from one generation to the next, providing financial stability and creating opportunities for future generations. CPA Canada notes that approximately $1 trillion in Canada is set to transfer to Millennials and Gen Z from Baby Boomers from 2023 to 2026 alone.

Generational wealth can come in many forms, including investments, real estate, businesses, and more. Taking a long-term approach to financial planning and making smart money moves can help you can lay the foundation for generational wealth that benefits your children, grandchildren, and beyond. And if you are a beneficiary of previous generations’ wealth, it’s also important to be a good steward of that wealth by building up your financial knowledge to manage the responsibility of inherited wealth and to continue the legacy of generational wealth in your family for multiple generations to come.

What is generational wealth?

At its core, generational wealth refers to wealth that is passed from one generation to the next. But perhaps more importantly, managing generational wealth is about thinking ahead and taking actions that will put future generations of your family in better financial positions.

Generational wealth encompasses any assets you accumulate and eventually pass on, including:

Investment portfolios of stocks, bonds, mutual funds, exchange-traded funds, hedge funds, and more
Real estate holdings like a family home, a cottage, rental properties, or land
Ownership stakes in a family businesses or other private companies
Valuable collectibles and family heirlooms
Cash
Proceeds of life insurance

Generational wealth isn’t just about huge inheritances or trust funds. It is not defined by a specific amount of money, nor is it only something for ultra-high net worth families to think about. It can range from moderate financial assistance, including helping your children fund their post-secondary education or helping with a down payment on a home, to large transfers of wealth through a family business or real estate portfolio. It also isn’t necessarily limited to passing assets to future generations. It can relate to financial assistance given to previous generations as well. For example, perhaps you want to provide financial assistance to parents to increase their standard of living in the last chapter of their lives.

With a strategic approach to saving and investing, even modest amounts of savings can grow substantially over time to become a source of long-term financial stability for your loved ones. The key is in planning. Even if you're starting small, consistently saving and investing a portion of your income can put you on the path to creating generational wealth for your family.

As part of that wealth journey, its imperative to understand how the range of investment accounts and plans available to Canadians, including non-registered investment accounts, RRSPs, TFSAs, FHSAs, RESPs, and more, fit into your long-term planning. You can learn more about each type of these accounts and how to be a smart investor in the BMO Learning Centre.

What is generational wealth transfer?

Generational wealth transfer normally refers to the process of passing down your accumulated assets to your children or grandchildren but again, it could also encompass financial assistance to older generations. Careful estate planning and wealth management can ensure your hard-earned money is used according to your wishes, but also in a tax-optimized way. The less you pay in taxes, the more money there is left for your family upon the transfer of generational wealth.

Many people historically have viewed the transfer of wealth from one generation to the next as something that happens when someone in the previous generation dies, but today it is becoming more common for families to plan wealth transfers before death for a variety of reasons.

In some cases, it’s for emotional reasons: there is a well-known saying that it is “better to give with a warm hand than a cold one”. This means that being able to see how future generations benefit from generational wealth transfer while one is alive can be very rewarding.

Sometimes, it just makes more financial sense to engage in “giving while living”. For example, buying a home in Canada today is increasingly tied to the ability of parents to help out their children. They might be able to save up and qualify to buy their own home at some point, but assistance from parents can help them start earlier or improve their standard of living. If you were planning on leaving them money anyway, and your financial planning suggests a high probability of a large estate surplus when you die, you might consider accelerating the transfer of generational wealth because it would have little impact to your quality of life and a tremendous impact to your other family members.

Some common ways to transfer generational wealth include:

Estate Planning & Wills: Through comprehensive estate planning, you can designate beneficiaries and specify how you want your assets to be distributed after you pass away. A well-crafted will ensures your wishes are carried out when you die. Other estate documents can also ensure your wishes are carried out in case you become incapacitated due to an accident or illness. BMO's estate planning services can help you navigate and plan around these considerations.
Trusts: Generational wealth is often transferred using legal structures like trusts, which allow for greater control and potential tax advantages. For example, you could establish a trust that pays out funds to grandchildren at certain milestones in their lives. BMO Private Wealth offers trust services to help you protect and transfer your wealth.
Gifting: Giving monetary gifts to family members while you're still alive is another way to share your wealth. Many people choose to help their adult children with major expenses like weddings, home down payments, or starting a business.
Passing Down a Business: If you own a profitable business, you may decide to keep it in the family by handing over ownership and control to the next generation. Providing your children or grandchildren with a proven source of income is a powerful way to extend your legacy. BMO offers business advisory and succession planning services to help you transition your business smoothly.

Generational wealth transfers can benefit from the guidance of experienced financial and legal professionals who understand the rules and can help you navigate any complexities. BMO Private Wealth's team includes specialized financial planners, tax specialists, trust and estate experts, and investment professionals who work collaboratively to create personalized wealth transfer plans.

“Generational wealth refers to assets and resources that are passed down from one generation to the next, providing financial stability and creating opportunities for future generations.”

Benefits of generational wealth

Beyond the obvious value of more financial freedom, generational wealth offers many valuable benefits for families, such as:

Financial Security: Having a pool of family assets to draw upon provides a safety net against economic downturns, job losses, medical costs not normally covered, and other unexpected events. Generational wealth means never having to start from zero.
Educational Opportunities: With the rising costs of higher education, having generational wealth to tap makes it easier for younger family members to access world-class schooling without taking on the stress of high student debt. Your investment could open doors that allow them to focus on their studies to give them the best leg up and could change the trajectory of their lives.
Entrepreneurship: Providing seed money or start-up capital gives the next generation an advantage in turning their business ideas into reality. Family backing can be the difference between a concept that never gets off the ground and one that becomes a successful venture.
Philanthropy: Generational wealth puts families in a position to have a positive impact on the causes and communities they care about most. Being able to donate money, establish a foundation, or otherwise give back in a meaningful way is immensely rewarding.
Legacy building: Some families have a desire to not only instill strong values across generations, but to also provide the wealth to help the family achieve multi-generational goals.

Ultimately, generational wealth is about so much more than dollar figures. It's a chance to create a lasting family legacy of increased financial flexibility, opportunity, and shared values. By making generational wealth a priority, you can empower your loved ones to chase their dreams and live life on their own terms.

6 ways to build generational wealth

Now that we have an understanding of the importance of generational wealth, let's explore some practical strategies for building it. While there's no single "right" way, these six strategies can put you on the right track:

Commit to Saving: The simplest way to start building wealth is to consistently save a portion of your income. Get in the habit of "paying yourself first" by setting aside money from each paycheck before spending on anything else. Over time, your savings will add up.
Invest for the Long-Term: Rather than letting your savings languish in a low-yield account, put your money to work by investing it. Creating a diversified portfolio of stocks, bonds, mutual funds and other assets helps your wealth grow much faster. BMO InvestorLine Self-Directed and adviceDirect make it easy to invest online, either on your own or with some guidance.
Working With a Dedicated Professional: Many households choose to delegate part or all of their wealth management to a professional. They can help you craft a personalized investment strategy aligned with your goals and risk tolerance.
Accumulate appreciating assets: Much of generational wealth is comprised of assets that increase in value over time. Being mindful about the balance between spending money on things that do not retain financial value versus spending money on assets that can increase in value for you over time can help create generational wealth. Businesses, investment portfolios, and real-estate can help maximize your net worth over long periods of time and across generations.
Diversify Your Income Streams: Relying on one source of income is risky. Protect your family's financial future by cultivating multiple income streams. That could be through a side business, or by considering assets that not only increase in value, but provide cash flow as well. For example, while a cottage might appreciate in value, a rental property might appreciate in value as well as provide a source of ongoing cash flow. Similarly, income-yielding investments like blue chip stocks or blue chip stock funds might pay dividends along with offering the potential for capital appreciation.
Teach Your Children Well: One of the most valuable gifts you can give is a solid financial education. From a young age, teach your kids the importance of saving, investing and making smart money choices. Instill the values and habits that will put them on the path to being good stewards of the wealth you pass down. BMO offers financial literacy and investing resources to help you talk to your children about money.

Remember, building generational wealth is a marathon, not a sprint. It requires decades of diligence, discipline, and long-term thinking. But the payoff—a lasting legacy of financial security—is more than worth the effort.

The bottom line on generational wealth in Canada

Generational wealth represents an incredible opportunity to make a positive impact that extends far beyond your own lifetime. By taking steps to build and preserve wealth, you can create a financial foundation that uplifts your family for generations to come.

Generational wealth enables you to protect your loved ones from economic hardship, opens doors to enriching life experiences, and empowers future generations to make their unique mark on the world.

While building generational wealth does take time and concerted effort, the process doesn't have to be complicated. Committing to saving diligently, investing wisely, diversifying your income streams and continually expanding your financial knowledge will put you on the right path.

Every Canadian has the power to begin building a legacy of generational wealth today. Your actions in the present can have a profound ripple effect that transforms your family's financial future for the better. And that is perhaps the greatest gift of all.