What are the Ethics of Generational Wealth?

With the generational wealth transfer on the horizon, many are wondering about the ethics of building generational wealth. This article explores the question from a few different angles and discusses how you can set your children up for financial security.

What are the Ethics of Generational Wealth?
Photo by Anna Shvets from Pexels

Generational wealth is a hot topic right now for a few different reasons. First, and likely most prominent in the US, is President Biden’s proposed tax increase. Under his plan, some extremely wealthy individuals could face a staggering 61% tax on inheritance.

Generational wealth is also coming up in conversations in preparation for The Great Wealth Transfer. While the exact number is uncertain, over the next few decades, a minimum of $15 trillion will be given to millennials. CNBC anticipates this number could reach nearly $70 trillion.

Unfortunately, an increased focus on wealth transfer is also a result of the ongoing COVID-19 pandemic, which has taken at least three million lives worldwide, but potential 2-3x that number. This also points to the conflicting emotions surrounding inheritance. When you inherit money from a family’s members death, you’re likely in mourning. Meanwhile, receiving a lump sum of money will probably bring you some amount of joy, which could make you feel guilty for being happy at someone else’s expense.

Amid all these feelings, raises the question of ethics in generational wealth and how individuals can act ethically when inheriting or endowing wealth. This article explores the question from a few different angles and discusses how you can set your children up for financial security.

What is generational wealth?

Generational wealth is defined by money and other assets such as real estate and stock holdings that are passed on to secure the family legacy. As parents, many individuals want to leave something behind to help ensure their children and grandchildren’s security.

However, just because one generation leaves assets to the next, doesn’t mean that wealth will remain in the family. Anyone can act irresponsibly and blow through the money. In fact, only 30% of generational wealth makes it to the second generation, with just 10% reaching the third generation.

Photo by riciardus from Pexels

Is it ethical to inherit money you didn’t work for?

One of the biggest questions surrounding generational wealth is about how ethical it is to inherit money you didn’t work for. The consistently rising cost of living with stagnant salaries for the past few decades have significantly widened the wealth gap. Millennials are set to become the wealthiest generation, but likely only a select few.

With such a disproportionate wealth distribution, many have pushed to have an inheritance tax of 100%, which would effectively surrender all of a person’s belongings to the state upon their death. On one side of the argument, individuals claim that a deceased person has no use for money and thus no say in what’s done with it. On the other, individuals feel that wealth amassed throughout one’s life is a legacy and the individual should get to orchestrate how that money is distributed. A key consideration here is that without the ability to provide for your family in the future, working hard in the present day may be less appealing for many individuals.

In the same ethical discussion, one may wonder if an individual inheriting money is responsible for any wrongdoings in amassing that wealth. For example, if someone’s inheritance is made up of money from businesses built on slave labor or war profiteering, is that individuals ethically obligated to make reparations in some way? Can someone, on the basis of their relationship with another, be held responsible for that person’s transgressions?

While this may seem like an ethical gray area, an individual can’t be held responsible for the wrongdoings of anyone else — even those they’re related to by blood. As an individual inheriting money, you may feel inclined to use it in support of causes or groups that have suffered as a result of that wealth generation.

What’s the difference between a philanthropic and an altruistic legacy?

Philanthropy and altruism differ slightly, highlighting a significant consideration in establishing a legacy. By nature, philanthropic efforts may lead to recognition and appreciation. Many individuals pursue philanthropic efforts to further their legacy by putting their name on a building, being recognized as a significant contributor, or other personal benefits.

Similarly, a benefit to giving away your wealth while you’re alive instead of after your death is being able to see how it’s used. Appreciating how an organization makes a difference with your donation may encourage you to make further donations or include them in your endowment. Meanwhile, giving your kids money for college and watching them “blow” it on material items may leave you wondering if it’s a good idea to provide an inheritance.

When endowing money to a charity or leaving it to your children, you may feel inclined to make specific rules or requests regarding spending the money. Conversely, altruism isn’t about the giver. These could include anonymous donations, contributions made after death without specific wishes, and more.

How can I support my children financially & set them up for future success?

Leaving money to your children doesn’t guarantee it will stay in the family, let alone ensure they’ll be able to maintain financial stability after you’re gone. While an inheritance may be one element of your plan to support your children, it should accompany a few key strategies, instead of being the only strategy.

Start early.

The best way to set your kids up for future success is to help them understand financial literacy at an age-based pace. Have candid conversations with your children about money and provide opportunities for learning, like providing an allowance.

With strong financial literacy skills, your children will be able to build wealth on their own, ensuring future financial security. Without these conversations and lessons, children are more likely to irresponsibly blow an inheritance, which is why most don’t reach the next generation.

Show pride in giving back.

Photo from Anna Earl on Unsplash

Instill goodwill in your kids early. Have them join conversations about where you’ll donate your money. Make a list of all types of causes, including:

  • Animals
  • Arts & Culture
  • Community
  • Education
  • Emergency
  • Environment
  • Health
  • Human Rights
  • Science
  • Women
  • Covid-19
  • Lesbian, Gay, Bisexual, Transgender, Queer/Questioning and allies (LGBTQ+)
  • Black, Indigenous and People of Color (BIPOC), Latinx

Discuss the causes that are important to you as a family, share your values, and what matters to the community around you.

In the same way you demonstrate giving back financially, volunteer as a family. Whether it’s serving Thanksgiving dinner at a soup kitchen, building beds for those without them, or any number of other service-based activities, getting your kids involved can demonstrate the value in giving back to your community.

Prepare them for any inheritance they will receive.

By instilling good financial values and a joy in giving back, you can help your kids start their adult life on the right foot, and be prepared to maintain their financial stability even after you’re gone. If you choose to do so, giving your children an inheritance is another way to help guarantee financial security.

Whether you choose to give your kids inheritance or know your parents plan to do so, get them ready for it. It might seem ideal to keep it a secret, but communicating with your children is the best way to help them prepare and make smart decisions.

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