70% Of Wealthy Families Broke By Second Generation
As more and more wealthy individuals from the baby boomer generation are entering retirement, we are at the start of one of the greatest wealth transfers in our nation’s history. Over the coming three decades, trillions of dollars are expected change hands, moving in most cases from first generation savers to younger heirs who have grown up privileged.
Most heirs have little insight into the inner workings of building and managing such wealth — in fact, most are not entirely clear on the size of their parents’ estates. If history is any guide, unfortunately, most of these heirs will — in one way or other — squander their inheritances and be unable to maintain the lifestyles they or their parents enjoyed beyond a single lifetime. In research released by the NAEPC Journal of Estate & Tax Planning[1], more than seventy percent of wealthy families are broke by the second generation, and 90% of estates are completely depleted by the third generation.
How is this possible? Research reveals the usual suspects for these failures: bad investments, too much debt and overindulgent spending. In short: it seems that most wealthy heirs grow up with a better understanding of how to spend money than to make it.
"...90% of estates are completely depleted by the third generation."
Remember: Even The Vanderbilts Eventually Went Broke
One of America’s richest families, the Vanderbilts, provide a cautionary tale about inherited wealth that illustrates the issue. Cornelius Vanderbilt, the family patriarch, managed to transform $100 borrowed from his mother into a $100 million dollar fortune by the time of his death in 1877. Today, that is the equivalent of about $185 billion, which at the time was more than the holdings of the entire US Treasury.
But within a short-span of only 30 years after his death, most of Cornelius Vanderbilt’s estate was gone, rapidly depleted by heirs who gave up on producing wealth, and instead turned their full attention to consuming it [2]. Within 50 years, most of the children and grandchildren had lost their entire fortunes, with their opulent homes sold at public auction to cover their debts. When the remaining Vanderbilts held a reunion at Vanderbilt University in 1973, there were 120 family members in attendance. Not a single millionaire was among them.
This is a story I regularly encourage my wealthy clients to tell their children and grandchildren. If we learn anything from the story of the Vanderbilts, it is that there is no fortune so big that it cannot be spent away to nothing. It reminds us that the Vanderbilts are not so different from the majority of other wealthy families who are broke a few short decades after the first generation passes away.
How To Prepare Heirs For A Future Inheritance
Consistently, wealthy families surveyed cite strong concerns about their adult children’s ability to steward the family fortune. But most families still can’t seem to bridge this concern with any action to prepare their heirs earlier. Many heirs have no insight into the size or complexity of their parents estate until one or both parents have passed away, throwing them into a complex whirlwind of financial responsibility that they are ill prepared to handle.
That said, parents are right to be concerned about how to engage their kids on this topic, and how and when to disclose the size of a child’s future inheritance. After all, telling your kids how much they stand to inherit without ruining their work ethic can be a tricky business. As Warren Buffett famously said: “I want to leave my children enough money so they can afford to be (and do) anything they want, but not so much that they can afford to be (and do) nothing.”
"Remind children that historically the “idle” rich tend to end up poor ."
Most Americans lack financial literacy, and in this regard, perhaps wealthy heirs are no different than their less affluent peers. But the stakes are much higher if you have accumulated wealth, and wish to leave a legacy that will support your children and grandchildren in future generations.
The key is to start early, while you are still raising your children and later spending time with your grandchildren, to teach them the basics of financial discipline. Expose them directly to how money is made and managed — whether that’s helping your ten year-old start a lemonade stand or open their first savings account. Discuss with children the cost of their future college educations, and how to evaluate future schools and degree programs both in terms of cost-benefit and their academic goals. Teach them how saving and investing can achieve longer term objectives.
It’s important to explain that while they may inherit in the future, they should never fully count on it — wealth after all can be depleted, and there’s no guarantee your assets will be available to them many years later. I regularly remind my younger clients that parents are living longer and that they may be well into their own retirements before ever seeing any inheritance. In short: kids should be raised to rely on themselves, their own careers, their own educations. Doing so throughout their own working lives will better ensure they know how to steward any future windfalls, regardless of where they come from. Finally, remind children that historically the “idle” rich tend to end up poor.
Working with a financial advisor who specializes in multi-generational planning can also help. A good advisor can begin to work with and help train your children and grandchildren well in advance of you handing over the purse strings. Assessing your heirs’ aptitudes and attitudes towards wealth will also aid you in determining what type of estate plan you should establish — whether money should transfer unfettered, or over time, or protected as a part of a multi-generational trust.
With trillions of dollars in transition over the coming decades, it’s more important than ever to establish a plan for ensuring the entire family is financially literate, and gradually trained to take on the roles of matriarch or patriarch for their own family fortunes. Even if you expect to leave your children very little in terms of wealth, instilling them with the skills and attitudes to steward their own financial future is an even greater gift.
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Footnotes:
[1] "The Future of Estate Planning - Prepare Heirs To Receive And Manage The Assets They Inherit,” NAEPC Journal of Estate & Tax Planning, June 2010.
[2] “Fortune’s Children: The Fall of the House of Vanderbilt” Authur Vanderbilt, II, 1989.
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