Imagine spending a lifetime building significant wealth only to see it vanish within a few short years after passing it on to heirs. This is an unfortunate reality for many families. A 20-year study by The Williams Group suggests that 70% of wealthy families lose their fortune by the second generation and a staggering 90% by the third.[i] As we approach the ‘Great Wealth Transfer,’ a term used to describe the massive shift of wealth from one generation to the next, an estimated $84.4 trillion is expected to change hands by 2045. [ii] Estate planning and wealth transfer presents both opportunities and challenges, making it more crucial than ever to understand how to put the odds on your family’s side.
Remember the Vanderbilts?
One striking example of how quickly family fortunes can evaporate is the Vanderbilt family. Cornelius Vanderbilt, once the wealthiest man in the world, left a vast fortune to his heirs in 1877. Within just 70 years, the family’s wealth was essentially gone. Today, none of Vanderbilt’s descendants can trace any wealth back to his legacy. [iii] The main reason? A lack of a decision-making framework and poor financial management.
Sadly, the Vanderbilts’ story is far from unique. This phenomenon is so common it has its own adage: “From shirtsleeves to shirtsleeves in three generations.” The primary culprits behind this rapid wealth loss include taking on too much risk, spending beyond means, and failing to adjust expenditures to financial conditions. Interestingly, poor investment decisions were less of an issue than one might think. Instead, the core problem often lies in how wealth is viewed and managed.
Desperately Seeking Discipline
The primary culprit for this rapid wealth loss isn’t often market downturns or bad investments—it’s usually poor decisions stemming from an overall lack of discipline around wealth preservation. Financial discipline involves making thoughtful and strategic decisions about spending, investing, and saving. But how can you create financial discipline in your family so the money you leave behind is cared for carefully? It’s not easy, but it’s certainly possible. It just requires communication and preparation.
Unfortunately, many families are not doing well on that front either. A study by Edward Jones found that while nearly half of individuals plan to leave an inheritance, only 27% discuss it with their families.[iv] This communication gap leaves heirs unprepared for the responsibilities of managing wealth.
How to Secure Your Family Legacy Beyond Estate Planning
Several strategies can be employed to ensure the wealth you created has the best chance of enduring.
Get an Estate Plan in Place. Establishing a comprehensive estate plan is essential because your goal should be finding the most tax-efficient way to transfer money. Start early by working with a financial planner and attorney to create an estate plan that fits your needs. That might include wills, trusts, or more complex strategies designed to protect your wishes, shield assets and maximize tax benefits.
Ideally, include your family in this process to encourage conversation and get them thinking about the responsibilities associated with preserving wealth. You can make it less awkward by including your financial advisor in the initial conversations. At our firm, we frequently attend family meetings and conference calls to break the ice and provide some third-party objectivity to the conversation.
Communicate Early and Often. Then, keep talking! Open and ongoing communication within the family is crucial. And bring in younger generations sooner. Even if they can’t grasp everything, they can begin to understand the responsibilities that come along with wealth. Regular family meetings to discuss financial goals, philanthropy and the mechanics of wealth management can foster a sense of shared purpose and understanding.
Include Formal Education. Educating your heirs is another critical step. Don’t assume they received personal finance coursework as part of traditional education: it’s too often missing. Financial literacy can be provided through formal education, such as courses and seminars, and informal education through family discussions or one-on-one sessions with financial advisors. Sharing your financial journey and the lessons you’ve learned can also impart valuable wisdom and caution against common pitfalls.
Set Up Guardrails. Wealth preservation is challenging for many people, so sometimes the best thing you can do is set up guardrails to help heirs stay on track. These guardrails can take many forms, but the goal should be some accountability and guidance to help oversee family wealth management. The specific approach can vary, but having trusted professionals involved can assist in making collective decisions and resolving conflicts. Clearly defining family member responsibilities is also critical to enhance accountability and prevent misunderstandings.
Professional Guidance with Estate Planning Can Make the Process Easier
Early involvement of professionals can significantly ease the complexities of wealth transfer, making the process less daunting and more manageable. Financial planners, trusted attorneys, and tax advisors can provide invaluable insights and ensure that your heirs carefully manage the family assets, even in your absence.
Beware Today’s Unofficial Advisors
Having advisors you personally select and introduce to your heirs can be a crucial part of helping your wealth management approach endure after you’re gone. It is especially important today since heirs can easily be influenced by external factors such as social media. In that domain, financial advice is abundant and freely given, but it is not always reliable or even sensible.
A study by WallStreetZen found that 63% of stock-related videos on TikTok were misleading, with many not disclosing investment risks. [v] This underscores the need for financial education within the family and clear communication lines before and after you’re gone.
Key Takeaway
Preserving family wealth requires more than just estate planning; it demands proactive education and ongoing communication with heirs. By fostering open discussions, sharing your philosophy and involving professional advisors, you can build a strong foundation for lasting financial stability.
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[i] https://www.advisorhub.com/resources/securing-the-family-tree-how-to-preserve-generational-wealth/
[ii] https://www.cerulli.com/press-releases/cerulli-anticipates-84-trillion-in-wealth-transfers-through-2045
[iii] https://www.afr.com/wealth/investing/where-did-all-the-billionaire-families-go-20240206-p5f2s9
[iv] https://www.edwardjones.com/us-en/why-edward-jones/news-media/press-releases/great-wealth-transfer-research
[v] https://www.fastcompany.com/91015787/63-of-financial-advice-on-tiktok-is-misleading-one-study-found-users-love-it-anyway
