Because generational wealth is such a complex topic, misconceptions about what it is, how to accrue it, and how to pass it on abound. One common confusion is that homeownership is the key to generational wealth. While there is no question that owning assets like a house can contribute to wealth, it’s often not the only—or even the best—path to creating an enduring financial legacy.
Certified financial planner Guy Baker says the key to building generational wealth is to create a plan. “Wealth rarely happens quickly,” says the founder of Wealth Teams Alliance in Irvine, Calif. “To build a legacy, the family needs a long-range plan, and they need to stick to it.”
To understand what contributes to generational wealth, we spoke to financial experts who debunked three common misconceptions about financial legacy and home equity.
Myth #1: Owning a Home Creates Generational Wealth
Some people believe that generational wealth is only created when homeowners pass down a house to their children, but it’s much more complicated, says Mike Toney, finance director at Car Donation Center in Huntington Beach, Calif.
Homes are considered a consumption asset, which means they’re used daily, deteriorate over time, and cost money to maintain and repair. These types of assets can increase or decrease over time based on the economic environment, but they don’t generate income or cash flow like an investment asset does, according to Toney.
“Investment assets like stocks and bonds can generate income, which can be reinvested or spent by the owner to increase their future wealth,” he said.
Myth #2: Generational Wealth Only Refers to Developments After One Generation Dies
Generational wealth means different things to different people. Some may feel that the goal is only to pass along assets to the next generation, but experts say money alone isn’t a successful wealth transfer. A key part of generational wealth building also involves transferring financial literacy so the next generation has the tools they need to manage their inheritance.
Learning financial literacy at a young age prepares children to handle money and other personal finance topics, such as budgeting, investing, and building an emergency fund, according to finance expert Ben Arbov.
“Building wealth and keeping wealth require two different skill sets,” said the founder of New York-based Greatest Gift, which provides guides, tools, and tips on financial parenting and building generational wealth. “Financial literacy for kids is key in creating a lasting financial legacy.”
Myth #3. Tapping Home Equity Eats Away at Generational Wealth
While a home can be an emotional touchstone for a family, it’s not the foundation of generational wealth. Sometimes, a family can improve its wealth by tapping home equity through a reverse mortgage or another equity extraction strategy.
Tapping into home equity through a reverse mortgage doesn’t necessarily affect or diminish inheritance for heirs, Toney asserts. “It allows you to leave more cash in an investment account or other assets for your heirs,” he said.
In most cases, heirs should be able to access the remaining equity after the reverse mortgage is paid off, according to Sean MacIntyre, founder of DIYwealth.com, a Baltimore-based financial literacy and publishing startup.
Should the heirs wish to keep the home rather than cashing out, there are provisions for doing that as well. “Depending on terms and conditions, heirs can take out a mortgage on the bequeathed property to pay off the reverse mortgage,” said MacIntyre.
Presuming terms are favorable, tapping into a reverse mortgage frees up capital to invest at a higher return, according to Baker. “If the new capital can grow faster than the equity in the house, less the reverse mortgage increase, then why not take it out?” he suggests. “Plus, it frees up cash flow to do other things.”
Though a complex topic, investigating sources of generational wealth and formulating a plan for generating it is a powerful action that can reverberate through generations. Wherever you are in the process, enlisting the help of a qualified financial advisor to inform you about investment avenues and strategies can take you and your family to the next level.
Seniority is published by Finance of America Reverse LLC. The views expressed in this publication are those of the author alone and do not necessarily reflect the views and opinions of Finance of America Companies. This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.
