Preserving Wealth Over Generations

Preserving Wealth Over Generations

Several common sayings refer to the phenomenon of losing inherited wealth.  One is “shirtsleeves to shirtsleeves in three generations.”  Another is “the first generation makes it, the second spends it, and the third blows it.”  These sayings are supported by numbers.  According to a recent article in the Wall Street Journal, 70% of family wealth is lost by the end of the second generation and 90% will be gone within three generations.  Wealth that comes from family businesses can be even harder to preserve.  A 2014 Forbes article reports that only about one in three businesses pass to the next generation and only 10% of family businesses survive to the grandchildren’s generation.  Even fewer will last beyond that point, according to the Family Business Institute.


What causes this phenomenon?  How can you protect your family from experiencing the same result?  Those who inherit money often suffer from the same “sudden wealth syndrome” as lottery winners.  Both of these groups tend to blow through their wealth in a very short amount of time.  This is frequently because they are not prepared, emotionally or practically, to manage their newfound assets.  Simply having an estate plan is not enough to prevent this from happening.  Families should engage their future heirs in the planning process and help them to understand the purpose of making these plans.  If you plan on leaving a substantial inheritance to your children, you should engage them in making financial plans or choices beforehand. 


Family conflict often results in lost wealth.  Family businesses without effective succession plans can easily fail due to lack of leadership and family infighting.  A survey conducted by the Williams Financial Group found that the most common reason for deterioration of family wealth was distrust and failure to communicate among family members.  This occurred 60% of the time among those surveyed.  The second most common reason was a failure to prepare children to responsibly manage their inheritance.  This occurred 25% of the time among those surveyed. Financial planners and estate planning attorneys frequently see anecdotal evidence of this trend.  If you want to discuss your financial and estate plans with your future heirs but aren’t sure where to start, ask your advisors for their help.  They know how important family communication is to successfully preserving wealth.  They will probably have a few ideas about how best to approach these issues.  Leaving clear and detailed instructions to your heirs in your estate plan may help to minimize conflict.  Those instructions should be part of a larger effort to communicate with your heirs about your goals and the reasons behind the planning you have done. 


Sixty percent (60%) of high-net-worth individuals don’t know four (4) important facts.  One Wall Street Journal article states that they don’t know (1) annual returns earned by their managers, (2) the fees charged, (3) haven’t evaluated their risk levels or (4) their tax exposures.  The first step towards maintaining wealth is educating yourself (and then communicating with and educating your family).  Become involved in the process of managing your assets so that you can have confidence that the plans put in place will achieve the objectives that are most important to you.  Learn about relevant issues that can affect your ability to preserve your wealth, such as current tax laws.  Find a collaborative group of advisors.  At a minimum it should include an experienced estate planning attorney, a CPA and a financial advisor.  By truly working together they can help you create and implement a plan that will ensure that you and your family are taken care of for your and their lifetimes.  Baby boomers are set to inherit an estimated $7.6 trillion over their lifetimes.  This number underscores the need for this group to address the issue of wealth preservation if they want to ensure financial security for both themselves and their children. 


If you want to create an estate plan that focuses on preserving wealth and providing security for generations, or if you have questions about how to update an existing plan to achieve this goal, call our office at 888-822-8778 to learn how we can help.


Categories: Blog, Estate Planning


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