A shocking 60%-70% of family fortunes dissipate by the second generation, with a dismal 90% gone by the third. Beyond the obvious financial implications, other legacies—like family businesses and philanthropic, charitable priorities—are also at risk.
Part 1 of “Keeping it All in the Family” provides some background context, noting just how much is at stake when it comes to a proactive intergenerational wealth stewardship strategy. Now let’s continue this important conversation—starting with a brief look at why this happens followed by five specific steps you can take to help shape your own family’s legacy for generations to come.
Heirs are not prepared: In the U.S., it is still often considered taboo to even talk about money, and this can be severely detrimental to those who are inheriting wealth. “One of the big reasons wealthy families tend to blow it is that the kids aren’t prepared or the parents haven’t talked to them about,” says Rod Zeeb, CEO and Co-Founder of Heritage Institute.
In 2010, U.S. Trust surveyed high-net-worth individuals with more than $3 million in investable assets to find out how they were preparing the next generation. This research, cited in Money.com’s article “70% of Rich Families Lose Their Wealth by the Second Generation,” notes two key insights:
- 78% felt the next generation was not financially responsible enough to handle inheritance.
- 64% admit they have disclosed little to nothing about family wealth to their children.
Survey respondents listed various reasons:
- They were taught to not talk about money.
- They worry their children will become lazy and entitled.
- They fear the information will become public.
When asked to provide an opinion on these findings, the article quoted a number of financial advisors’ revealing responses:
- “Most of them have no clue as to the value of money or how to handle it.”
- “Generation Threes are usually doomed.”
- “It takes the average recipient of an inheritance 19 days until they buy a new car.”
Avoidance of the difficult conversations: As we already mentioned, the taboo around talking about money is still challenge for so many. Wealth and estate planning can often be difficult subjects to broach within a family.
Family dynamics make things complicated: You can’t discount the impact of individual personalities, emotions and expectations when it comes dividing up an estate—especially when dealing with multiple heirs. If you’ve seen the HBO series Succession, you know that it can get ugly, and heirs are often left without clear instructions on how to handle the money or other parts of the estate. This can contribute to tension among surviving family members, and even an eventual mismanagement or potential loss of family fortune.
Proactive Solutions: Shaping Your Enduring Legacy
Now that we better understand the why, what steps can be taken to ensure that your own family isn’t part of this troubling statistic? If your goal is to leave a lasting legacy for future generations, there’s no time like the present to start thinking about exactly what that means—beyond the transfer of money and assets.
We’ve listed five ideas here to help jumpstart your planning and encourage you to further the conversation with your family, Mayflower Advisors’ wealth manager and other trusted advisors.
1) Help Educate Your Heirs: There’s a big disconnect between what parents think their children are learning about money and what they’re actually learning, especially when it comes managing and maintaining wealth. As you know, the cultivation of wealth is not just about saving and spending wisely: It also includes investment, risk, philanthropy and much more. Of course, we can all benefit from a solid foundation of financial literacy, but those who are set to inherit family wealth have specific needs that should be addressed early and often.
2) Build Trust and Open Communication: One of the most important things parents can do is to have honest, detailed communication at appropriate points throughout childhood. Rich Morris, co-author of Kids, Wealth and Consequences, notes, “It’s not just one single conversation: “It’s conversations often and at every age and every maturity.” Developing intergenerational dialogue is a great way to help facilitate open communication and foster trust. This could take the form of family meetings to help develop a clear path and picture of the plan for what inheritance may look like and the responsibilities it entails, and it’s critical to include your trusted advisors in those conversations.
Mayflower Advisors’ Senior Wealth Manager John Wilcox, CFP®, AAMS®, AIF® , explains, “We have found that our initial point of client contact becomes a solidified relationship only when we begin working closely with a spouse and/or other family members. An advisor’s ability to connect on those deeper, intergenerational levels is more than money management: These relationships represent the hopes and dreams or charitable endeavors of future generations.”
3) Define and Cultivate Your Family Values: Whether it’s building the family business, engaging in civic and philanthropic endeavors or developing a family foundation, defining what you want your legacy to be can help serve a guiding principle for successive generations. Some financial experts even recommend that families come up with mission statements—not unlike businesses—to establish and maintain your family values and preserve wealth. With a strong understanding of the values that are important to you, your heirs will be more empowered to take responsibility for their choices.
4) Consult with Your Trusted Advisors: In addition to handling the legal aspects or financial paperwork, your personal wealth manager and other professionals can often act as an impartial voice of reason, especially during potentially awkward conversations or when making difficult decisions. They can also help you set expectations, develop guiding principles for your heirs, determine equitable ways to distribute wealth and foster financial literacy among your heirs. Wilcox adds, “Close collaboration between a solid team of a trusted advisor, CPA and estate planning attorney is also a big part of that planning for the families we work with.”
5) Consider a New Wealth Transfer Timeline: Most family wealth transfers are one-time events, which generally occur upon the passing of a family member. The Institute for Preparing Heirs suggests that an increasing amount wealth is now being transitioned before the estate transfers—aka “giving while living”: “This makes sense since people are living longer and fuller lives and parents and grandparents want to experience in their lifetimes, the joy of seeing their children benefit and learn from family wealth.”
We pass on many traits to our descendants unintentionally, both through nature—things like eye color, hair color, hair texture—and nurture—maybe your wittiness, smarts, or savvy. If you want to pass on something more substantive to your heirs, take active steps to ensure that your wealth stewardship plans reflect your long-term, multigenerational legacy goals.
While it can feel intimidating to get started, many are relieved and pleasantly surprised when they realize that loved ones want—and need—to have these important conversations. Proper planning now can bring peace of mind and help cultivate your family’s security, prosperity and dreams for generations to come.
These tips are informational in nature and not intended as individualized financial, legal or tax advice. Wealth management and financial planning decisions are complex and fluid and should be structured around each client’s unique situation and needs. Parties should carefully consider all related benefits, risks and costs and speak to their trusted advisors before making any significant decisions.