Digging Deeper Into Why 90% Of 3rd Generation Wealth Is Lost

Asia Finance:

Around the world and across centuries, heirs of the super-wealthy have squandered wealth in a few short generations.

In the US, they say: “shirt sleeves to shirt sleeves in three generations.” In Asia, families speak of going from rice patty to rice patty in three generations. Meanwhile, the European expression likens entrepreneurial success to no longer having to wear clogs, but then the seemingly inevitable happens – grandchildren of the impossibly rich lose all their inherited wealth, resulting in the family going back from “clogs to clogs in three generations.”

Indeed, wealthy families across continents lose some 70% of their wealth by the second generation, and a stunning 90% by the third, according to the Williams Group wealth consultancy.

Meanwhile, statistics from WealthCounsel, a US-based collaborative organisation for attorneys and wealth planning revealed that 65% of family fortune is lost by the second generation and 90% is gone by the third.

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Why is this happening?

1. The majority hide their wealth from their kids

A 2015 survey by the US Trust on high-net worth individuals (HNWIs) with over US$3 million in investable assets found that the majority do not disclose their wealth to their children.

According to the survey, 78% of HNWIs feel that the next generation is not financially responsible enough to handle significant wealth, and 64% admit they have disclosed little to nothing about their wealth to their children.

The survey lists various reasons for this: People were taught not to talk about money, they worry their children will become lazy and entitled, and they fear the information will be compromised.

Unfortunately, such conservative approach to money could be the reason why third-generation heirs turn out to be so ham-handed with their wealth. When rich kids receive such significant amounts of money without prior coaching on the purpose of money, they will seldom take the time or initiative to understand the values that helped accumulate the sum of the inheritance.

2. Rich kids suffer from the “affluenza” syndrome

Often, people who have struggled up the proverbial rags-to-riches path are highly motivated and even obsessive when it comes to accumulating (and preserving) wealth.

Lacking that drive, children of the super-wealthy are usually better at spending than accumulating money. Grandchildren are even bigger spendthrifts.

This is because the offspring of the super wealthy often suffer from “affluenza,” according to Tim Voorhees, tax lawyer and investment adviser from WealthCounsel. “They lack purpose, self-esteem and the ability to delay gratification,” he said.

Inheritors do not understand the hard work and grit invested in accumulating the wealth. Nor do heirs – born with a silver spoon – have much motivation to develop the bias towards diligence, delayed gratification, thrift and other values required to accumulate and preserve wealth.

As problems get worse, heirs withdraw from others to avoid accountability and develop progressively more serious social disorders, Voorhees said.

3. Ineffective wealth transfer planning

If you fail to plan, you plan to fail. Unfortunately, family business founders often leave flawed estate plans that do not effectively map out who will inherit and control the family’s assets.

In the 19th century, Cornelius Vanderbilt built a massive fortune from railroads and shipping and had an inflation-adjusted estimated net worth of US$185 billion. His children and grandchildren are known for building luxurious mansions in New York City and Newport in Rhode Island.

But when 120 Vanderbilt descendants held a family reunion in the 1970s there wasn't a single millionaire among them, CNNMoney noted.

Family members without an effective roadmap for wealth transfer commonly leave their heirs working at cross purposes. Further, when the founder of a family business fails to train the next generation of leaders to maintain relationships based on the founder’s core values, trust deteriorates.

Too often, lawyers wrangle for years and years, and dissipate much of the estate value as surviving heirs engage in bitter power struggles over inherited wealth if the business owner dies abruptly.

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How to safeguard multi-generational wealth?

If you have never talked to your kids about money, it’s time to start. You may think you are encouraging them to work harder by not disclosing your wealth, but that really just fosters ignorance.

Education is paramount if the family wants their wealth to last multiple generations. While higher education is important, it is more important for heirs to receive education in the form of experience and wisdom passed down from family members who have either earned their wealth or have experience managing wealth successfully.

It is equally important to chart a roadmap that plans the direction of the future sustainability of the family’s wealth. This roadmap should clearly outline how wealth should be managed and invested for future generations, and should also incorporate tax planning strategies to minimise the effect that taxes have on wealth over generations.

For example, if your family has US$100 million in assets, you should seek the services of an estate planning attorney with experience with these amounts to come up with appropriate strategies.

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Lastly, a trained wealth counsellor who can help your heir inherit your relational values before they inherit the value of your wealth can prove extremely helpful in ensuring the sustainability of your wealth across future generations.