Personal Finance

Generational Wealth: Why do 70% of Families Lose Their Wealth in the 2nd Generation?

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Generational wealth is an aspect of financial planning that is geared toward passing down stable, significant financial resources to future generations. But can anyone really teach wealth? If all it took was knowledge to become wealthy, then most business people, professors, financial planners and others would be very wealthy. The reason they’re not is because becoming wealthy requires a lot more than knowledge. It requires hard work, discipline, sacrifice and many other traits that are very hard to teach and pass on.

The generation that earns the wealth is the generation that worked and experienced hardships to make sure they achieve something better for themselves. They work hard and diligently save to achieve their goals. Their efforts pay off and by the time they are ready to retire and live comfortably, with assets to pass on. The next generation, while growing up, sees their parent's struggles and have a good understanding of the value of sacrifice and hard work. While they may be more comfortable as adults, they can still remember the frugal aspects of their lives growing up. Since they are aware, they make better decisions surrounding education and financial choices enabling them to build on the foundation given to them by their parents. The third generation never realizes the struggles and sacrifices the previous generations endured. The only thing they know if a life of plenty and have a real lack of understanding of what is needed to create and maintain the lifestyle they have grown accustom to.

It is estimated that 70% of wealthy families will lose their wealth by the second generation and 90% will lose it by the third. There are a variety of reasons why this happens:

  • Generations are taught not to talk about money
  • The prior generations worry that the next generation will become lazy and entitled
  • Many have no clue about the value of money or how to handle it

Most parents find it very difficult to discuss their wealth, and what happens when they’re gone, with their children. Whatever the reasons for lack of transparency, the failure to discuss will likely end with such issues like unnecessary taxes, costly estate fees, and possible family strife. Also, by not detailing their intentions, you run the risk of eroding the value of your estate.

The families that do maintain their multi-generational wealth are able to do so by communicating with the next generations in a very straightforward manner. The rules they live by to do this are very simple but not always easy. These tips can be used by anyone who wants to have a successful conversation about wealth with their children.

1. Having Lines of Communication: Open communication builds the trust that is the basis for sustaining your family’s wealth. Preparing the next generation for what they can expect is critical and you should take advantage of any teachable moments that arise. By doing this, the next generation can learn, understand and eventually participate in decisions that can affect the family’s wealth. It could also be a good idea to introduce a wealth expert/advisor to help facilitate a productive discussion. This could lead to a better understanding among the family members and help them discover shared values and passions. These values and passions could result in the members to work together and share in decision-making regarding the family wealth. They are also critical in helping them stay together during times of adversity.

2. Share Decision Making: More often than not, beneficiaries of family wealth are unable to properly manage what they’ve inherited. Often this is the result of decisions made by the earlier generations regarding the members' involvement with decisions made managing the wealth. By keeping the next generation out of the decision-making process can lead to serious dysfunction and lead to a serious lack of understanding about how the wealth is managed. They will be lacking the skills needed to ensure they lead a happy and productive life. Without the necessary core values or understanding of their family’s goals, the ability to maintain and grow the wealth is lacking.

3. Consider an Impartial Trustee: Even with a solid line of communication open and a proper decision-making process in place, here will still be some challenges that a family will not be able to handle on their own. Having an objective third-party point of view could be useful, freeing any discussions from emotions that family members may bring to the table. Having a Trustee can ensure that your wealth is properly managed and will be distributed properly. If there are intangible assets involved, a trustee, as a neutral party, can protect the beneficiaries over a longer period of time. They can also mediate over emotional attachments that some family members may have over certain items, items that could eventually lead to litigation amongst the family.

4. Make a Plan: Here is where you develop a clear goal that plan the direction of the wealth so it is sustained for future generations. Lacking a proper plan could result in the wealth being lost for future generations to taxes, poor investments and unprepared recipients of the wealth. His plan should be a roadmap providing in-site on how the wealth should be managed and invested for future generationsBringing in a Financial Planning Professional, one who has the experience dealing with the areas you want to focus on and handling your level of wealth, should be considered here as well. This can help ensure that there will be something there for future generations.

It is nearly impossible to pass on family wealth to the generations beyond your grandchildren and there are plenty of statistics that back that up. There are many pitfalls that you can avoid to make sure that your hard work will last well beyond the third generation. Along with investing wisely and developing a good estate plan, educating the next generations is a crucial element in making your wealth last. Put the values you believe in into practice to sustain your family as well as your fortune.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.