By Rachel Leland, Next Avenue
While reliable data shows that the very rich are, for the most part, getting much richer, some families go from “riches to rags” by failing to carefully pass down wealth from generation to generation.
Some financial advisers tell their clients that only 30% of high-net-worth families succeed in transferring their wealth for two or more generations. Success in this context is defined by the Institute for Preparing Heirs as having a plan that “results in future generations retaining the family financial assets while remaining a unified family” (emphasis added).
Skeptics say the institute’s narrow definition of success inflates the share of apparent failures, but many financial services firms use the 30% figure in their marketing materials.
The Great, Shrinking Fortune
To be sure, there have been many family fortune flameouts. The biggest and perhaps best-known was the family of railroad and shipping tycoon Cornelius Vanderbilt. By the time he died in 1877, he’d amassed a fortune that surpassed the coffers of the U.S. Treasury. However, within 30 years of his death, not a single family member was among the richest people in the U.S., according to Arthur T. Vanderbilt II’s book “Fortune’s Children.” In 1973, not quite a century after the Commodore died, 120 of his descendants gathered at Vanderbilt University for a reunion; none was so much as a millionaire.
Railroad tycoons’ families aren’t the only ones who are ill-fated to lose wealth over generations.
Many wealthy families are familiar with the so-called “third generation wealth curse” or “shirtsleeves to shirtsleeves” phenomenon, and even those who are dubious about it recognize that preserving family financial legacies means transferring values just as much as it means transferring real estate, investments, savings, business ownership, intellectual property, art and jewelry.
How Families Lose Wealth
A Vanguard Group wealth advisor, Matt Fleming, cites a lack of communication and trust as the most prominent culprits when families fail to pass on their wealth to younger generations.
A 2023 study conducted by The Williams Group, an estate planning advisory firm in San Clemente, California, concurred with Fleming’s observation and showed that when families fail to transfer their wealth to the next generation, 60% do so because of a lack of communication and trust in the family.
Having trust and communication not only make it possible to discuss important matters like how heirs can locate and gain access to previously undisclosed assets and bank accounts, it also is vital for older generations to pass down values required for building, preserving and growing wealth.
Discuss Family Values
Fleming said that to encourage dialogue, he works with clients to help verbalize their values through a mission statement that they can easily share with younger generations.
“A number of clients say, ‘I want my kids to work hard,’ ” Fleming said. “I don’t want to pass on a ton of money that just enables them to do whatever they want.”
Jordan Grumet, a multimillionaire and child of multimillionaires, said that his parents never pursued wealth for its own sake but instead thought of their careers and financial resources as a way to make a difference in the world — a value they passed on to their son and has paid dividends.
Grumet followed in the footsteps of his late father to become a physician, a role he said his father thought of as “the joy of life.” Later, Grumet began blogging about topics that interested him, such as wellness and personal finance, before eventually publishing his book, “The Purpose Code,” which explores how to maximize happiness while leaving a lasting legacy.
“I tend to keep making money because I’m doing things I really love doing,” Grumet said.
David Fritch, an estate planning attorney in Jasper, Indiana, guides families through these meaningful conversations and feels that the families that come out ahead are those that openly discuss financial realities and values with the younger generations.
What Is Wealth For?
“My approach is to have clients share life stories with heirs, framing wealth as a tool to amplify purpose, not an entitlement,” Fritch said.
Grumet said getting children and grandchildren to think of their wealth as something to invest rather than merely spend will allow them to pursue careers that align with their passion and not just their financial needs.
Grumet said his parents reduced their tax burden by gifting a portion of their wealth to their children and grandchildren, giving his children an opportunity to exercise the family’s financial values as stewards of that money.
Discuss Your Estate Plan
“If my kids just take that wealth that my parents need to dissipate and every year put it in the stock market and are good stewards of it and don’t touch it, they’re going to have a life for themselves where they don’t have to worry about making money as much for a living,” Grumet said. “They can go out and do what they want.”
Discussing your estate plan with your family might feel awkward, but doing so clearly establishes your wishes and can even prevent family conflicts from erupting after you die. These discussions also can prevent assets from being lost because the children or grandchildren don’t know they exist.
Fleming said it could be beneficial to have an estate planner or financial advisor attend estate planning meetings in addition to family members.
A Spendthrift Trust
If someone doesn’t feel confident their beneficiary’s values align with their values after discussing their estate plan, options are available to control how assets are passed down.
“If there’s high enough conviction, there can be restrictions placed on investment strategies and estate planning,” Fleming said.
For example, in a spendthrift trust, the beneficiary doesn’t control the trust’s assets until they achieve provisions the trustee has made. Some examples are graduating from college or holding a job for some time.
Financial Education Is Wealth
The third-generation wealth curse often befalls families where younger generations, especially grandchildren, are detached from how their predecessors went about building wealth.
Ensuring your children and grandchildren are financially literate is the cornerstone of preserving and growing the wealth you already have.
Fleming recommends that older clients directly discuss financial topics like saving, investing and retirement with their children and grandchildren, highlighting personal experiences and life lessons.
“There are investment and financial lessons that they’ve learned along the way that have caused them to have conviction to invest in a certain way,” Fleming said, “and so being able to articulate ‘Here’s why I invest this way’ and share that with your family can be really important, particularly when you expect that wealth to span several generators.”
Vanguard offers educational resources on topics like investing or saving.
Give Heirs Room To Fail Early
While teaching finance through books or online resources is a great way to familiarize your children and grandchildren with the basics of investing or running a business, Grumet said parents or grandparents should add experiential learning, even if that means giving them room to make mistakes.
“[There’s] this idea that you can give your children and grandchildren some experiences with money that are safe enough but also gives them some leeway to fall on their faces,” Grumet said.
To create an opportunity for his children while they were growing up to be responsible with money, Grumet gave his children an annual allowance that they could use to buy things they wanted. By doing this, Grumet allowed his children to evaluate and budget finite resources.
Learning to Be Thrifty
“My daughter, for instance, would save too much and have too much at the end [of the year], and then she would look back and say, ‘Boy, I probably could have done a little bit more,’ ” Grumet said. “Whereas my son would be aggressive … and then he [would] drop his phone and break the screen and realize he didn’t have enough money to fix it because he spent all of his money.”
As another example of experience-based learning, a client of Certified Financial Planner John Pace started a family foundation and involved the grandchildren in grantmaking decisions from a young age.
“Over time, the grandchildren developed a strong sense of purpose around the foundation and carried on its mission,” Pace said. “This helped unite the family through shared values and mitigated risks of squandering wealth.”
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