Why Passing on Your Accumulated Wealth Isn’t Enough
Why do many countries have an old proverb referring to a family’s net worth? Because it’s very unlikely your family’s net worth will survive the next three generations — no matter where in the world you live. In Italy, the expression is “from the stable to the stars and back again.” In China, it’s “from peasant shoes to peasant shoes in three generations.” The Scottish proverb is, “the father buys, the son builds, the grandchild sells and his son begs.”
Studies of high-net-worth families have found that roughly 70% of all families fail to sustain their familial wealth across multiple generations. Importantly, this research concluded that any mistakes in financial or tax decisions accounted for less than 5% of the failures. By contrast, 60% of the failures were found to result from a lack of communication and trust within the family. In 25% of the families studied, family wealth dissipated because the heirs were unprepared.1
Unfortunately, we’ve seen families fight over assets and make bad decisions — and then not talk to each other, which leads to more bad decisions. That’s why we must all work harder with business owners to try and help the second and third generations to understand what the first generation went through and what they learned during their career.
For example, in upper New York State, the beneficiary of an outdoor advertising business inherited $14 million (after taxes, he was able to keep $10 million) in 1998. He and his family faced temptations to indulge in expensive homes and toys. After 10 years of bad decisions, the assets were mostly gone, and at age 59, the son started looking for work anywhere.
In 1999, when Jay Pritzker (the patriarch of the Pritzker family) died, family members squabbled over running the family business. This squabbling led to an agreement in 2001 to break up the business empire that at the time included the Hyatt hotel chain, the Marmon Group, a conglomerate of manufacturing and industrial service companies, the TransUnion Credit Bureau and Royal Caribbean Cruise Lines.
Working hard, running a business or developing a successful career takes time, and often several mistakes are made along the way. The older generation learned from every one of those mistakes, and somehow that information needs to be taught to their children and grandchildren; otherwise, they’ll be destined to make the same mistakes.
Over the next two decades, the greatest transfer of wealth in history will occur, and more than $80 trillion dollars will pass to the next generation.2 John F. Kennedy once said, “To those whom much is given, much is expected.” The generation receiving these assets needs training and guidance to manage, grow and protect these assets so that they’ll be retained for future generations.
The successes the older generation had during their career leave clues the younger generation needs to study and understand. Parents and grandparents who have the accumulated knowledge need to think of ways to pass on that knowledge, their values and their valuable assets to their children and grandchildren. Too many wealth accumulators simply pass on their assets through wills and trusts without passing on the accumulated knowledge it took to create that wealth.
Creative Planning specializes in helping families and business owners with valuations, succession planning, estate and income tax analysis, and retirement income projections. For more information, schedule a call with a member of our team.