How long does wealth typically endure after it is accumulated by the first generation?

One of the most frequently cited studies from the 1980s says that 70% of all fortunes are lost by the second generation and 90% vanish by the third generation. The popular American expression “shirtsleeves to shirtsleeves in three generations” has been repeated so often it is typically accepted as fact.

Subsequent research contradicts those findings and concludes the opposite is true.¹ “Focusing on what happens to business families, not individual businesses, researchers found significant longevity and success across generations as families pursued multiple entrepreneurial ventures,” writes consultant James Grubman, author of a 2011 report on the recent studies.

Take the experience of the Cargill family, for example, as proof that preparation pays off. The international food conglomerate that bears the family name was founded in 1865 and is now in its fourth generation of family ownership.²

Regardless of what the statistics show, there are steps you can take today to improve the chances that your financial legacy will be preserved by future generations. These steps go beyond the formal wealth and estate planning foundation you already have in place and can be implemented when your potential heirs are ready to make a modest commitment of time and energy. They address common vulnerabilities you can control, or at least positively influence.

Start With Conversations

The first step is to create a comfortable atmosphere where communication flows freely in both directions.

Be open and honest about the wealth you will pass down to your heirs, share the story behind its history and clearly communicate how you would like to see those resources used in the future.

Conversations that focus on your vision and avoid making demands set a positive tone and convey a sense of collaboration, letting your heirs know that they have an equal stake in shaping the family’s financial future. Then take the conversation one step further by encouraging your heirs to share their own idea of how the inheritance might be used most effectively.

The same advice holds true for business holdings, real estate, and other valuable property. Let members of the next generation know they are not just receiving assets; they will be trusted guardians of your professional and personal legacy. This reduces the chance of family wealth falling prey to common pitfalls such as high-risk investing, extravagant spending, and other vices that can distract individuals who suddenly control significant sums.

If warranted, consider writing a letter to your children, grandchildren, or other heirs. Known as a “letter of intent” or a “letter of wishes,” this document offers a permanent reference point for details about your family’s history, your personal mission, and background on the decisions you made in your estate planning documents. They are not legal documents, are not binding, and they do not replace wills or trusts (which are ideal for dictating exactly how your wealth is used). But they can supplement those documents by providing additional clarity.

Build a Financial Foundation

Everyone has his or her own unique degree of financial literacy, ranging from heirs who are convinced they have an expert-level understanding of complex financial concepts to those who lack an awareness of the fundamentals and have no interest in learning them. While it is unlikely your heirs fall directly on either end of this spectrum, it is important to know approximately where they stand in order to determine what they need.

Some individuals are self starters, eager to make financial decisions with little or no professional guidance, especially in this age of online trading. While their confidence might be admirable, these beneficiaries run the risk of overestimating their proficiency and making costly mistakes, such as trading too frequently and ignoring relevant information. If this is the case, arranging a meeting between your heir and an experienced wealth management professional is usually sufficient to provide a fresh, new perspective and tame any hubris.

On the other end of the spectrum are individuals who would prefer to leave all financial decisions to someone else, raising the possibility that they will fall victim to grifters and con artists. The goal here is to help your beneficiary understand basic concepts such as budgeting, saving, the power of compounded returns, and the risk-management benefits of diversification. At a minimum, they should be receptive to your guidance on what to look for in a financial advisor and the right questions to ask.

Nurture a Sense of Purpose

Experience shows that many third-generation trust beneficiaries spend freely, have few responsibilities, and surround themselves with people who fit the same description. While there is nothing inherently wrong with this lifestyle, these individuals usually miss out on the joy and fulfilment that comes with a sense of purpose in life—something that gets them out of bed in the morning. Affluent family members are already highly susceptible to substance abuse, depression, anxiety, and other mental illnesses. Lacking purpose amplifies this threat.

What can you do? Encourage your heirs to find something they are passionate about, from saving the planet to a career in music. Ideally, this avocation should involve some degree of social interaction and collaboration, since personal and professional relationships not only improve the quality of life but also extend lifespans. This activity does not have to be visible to the public, morally redeeming, or career driven. Just something productive, healthy, and rewarding.

If you are a first-generation builder of wealth, the choices of later generations might seem odd. But keep in mind that younger generations often have different priorities and passions in life. They also have an entirely different experience with wealth. For example, as you started accumulating wealth you probably learned some valuable financial lessons by making mistakes that were not devastating and not extremely costly. But the next generation will receive significant wealth in a relatively short amount of time. So, the financial stakes are much higher.

Remember that preserving family wealth comes with responsibilities for everyone involved. Your heirs have an obligation to embrace the duties that accompany an inheritance, whether that means keeping their confidence in check or learning financial fundamentals. Your responsibility is to point them in the right direction.

 

 

 

1. https://jamesgrubman.com/wp-content/uploads/2022/06/2022-06-There-is-no-70-rule-JGrubman-IFOJ.pdf

2. https://business.smu.edu.sg/master-wealth-management/lkcsb-community/how-beat-third-generation-curse