How to Plan for Wealth that Lasts for Generations

Shirtsleeves to shirtsleeves in three generations

About seven in 10 wealthy families lost their fortune by the second generation, according to a study of more than 3,200 high-net worth families by the Williams Group, published in 2003. By the third generation, that number had jumped to 90%.

More than half the time, the breakdown is in trust and communication. A quarter of the time it’s due to a lack of preparedness on the younger generations part, and the rest of the time it’s because the family’s values and mission are not clear.

Carrie Schwab-Pomerantz, president of Charles Schwab Foundation, senior vice president at Charles Schwab and daughter of famed investor Charles Schwab, has seen it happen to her friends. “These are wealthy third-generation heirs of turn-of-the-twentieth-century wealth who were told by their parents that they would never have to work a day in their lives, “ she says. Instead, they had to downsize their home, they had to go to work. It was not the life they were promised, because the money was gone.”

Why Does This Happen?

“Looking at the numbers, 78% feel the next generation is not financially responsible enough to handle inheritance, says Chris Heilmann, U.S.Trust’s chief fiduciary executive. And 64% admit they have disclosed little to nothing about their wealth to their children. The survey lists various reasons: People were taught not to talk about money, they worry their children will become lazy and entitled, and they fear the information will leak out.

When financial planners are asked why the wealthy are so poor at passing along money smarts, and why second- and third-generation heirs turn out to be so ham-handed, the answers were surprisingly frank.

A sampling: “Most of them have no clue as to the value of money or how to handle it.”

“Generation Threes are usually doomed.”

“ It takes the average recipient of an inheritance 19 days until they buy a new car.”

While the statistics may be grim, that doesn’t mean there’s nothing to be done about it. Here are some strategies to avoid seeing fortunes evaporate:

Talk early and often.

Discuss the hard stuff.

Create a pathway.

Importance of mentorship.