Why Does Generational Wealth Fade?

Many are the stories of generational wealth lost. 

In the late 19th century, industrial tycoon Cornelius Vanderbilt amassed the equivalent of $100 billion in today’s dollars – but when 120 of his descendants met at a family gathering in 1973, there were no millionaires among them. His fortune eroded within two generations of his passing.

Barbara Woolworth Hutton – daughter of the founder of E.F. Hutton & Company, heiress to the Woolworth’s five-and-dime empire – inherited $900 million in inflation-adjusted dollars but passed away nearly penniless (her reputed net worth at death was $3,500).

Why do stories like these happen? 

Why, as NASDAQ.com notes, does an average of 70% of generational wealth slip away in the hands of the next generation, and an average of 90% of it in the hands of the generation thereafter? And why do only 10-15% of family businesses survive into a third generation?

Lost family wealth can be linked to economic, medical and psychological factors, even changes in an industry or simple fate.

Yet inherited wealth may slip away due to a far less dramatic reason.  

Related: The Major Risks to Family Wealth in 2022

What’s more valuable, money or knowledge?

Having money is one thing; knowing how to make and keep it is another. 

Business owners naturally value control, but at times they make the mistake of valuing it too much – being in control becomes more of a priority than sharing practical knowledge, ideas or a financial stake with the next generation.

Or, maybe there simply isn’t enough time in a business owner’s 60-hour workweek to convey the know-how or determine an outcome that makes sense for two generations. 

A good succession planner can help a family business deal with these concerns.

As a long-term direction is set for the family business, one should also be set for generational wealth.

Much has been written about baby boomers being on the receiving end of the greatest generational wealth transfer in history – a total of roughly $7.6 trillion, according to the Wall Street Journal – but so far, young boomers are only saving about $0.50 of each $1 they inherit. 

If adult children grow up with a lot of money, they may also easily slip into a habit of spending beyond their means, or acting on entrepreneurial whims without the knowledge or boots-on-the-ground business acumen of mom and dad.

According to a recent Caring.com survey, just 56% of American parents have a will or living trust. Wills are a necessity and trusts are useful as well, especially when wealth stands a chance of going to minors.   

Related: The Biggest Mistakes When Estate Planning 

For Generational Wealth: Vision matters.

When family members agree about the value and purpose of family wealth – what wealth means to them, what it should accomplish, how it should be maintained and grown for the future – that shared vision can be expressed in a coherent legacy plan, which can serve as a kind of compass.

After all, estate planning encompasses much more than strategies for wealth transfer, tax deferral and legal tax avoidance.

It is also about conveying knowledge – and values. In the long run, nothing may help family wealth more.

The Future of Generational Wealth

Between the inability to predict the future and the complicated nature of the process, many families continue pushing this off over and over and over. 

As a fiduciary financial advisor, I’m able to take a 360-degree angle look at a financial plan to make sure that estate planning is not only included but done properly with even the most unexpected future in mind.

If you feel you need to prepare more for the future or reexamine your existing estate planning strategy, I’d love to set up some time to chat. We’re happy to work with you either in person, over the phone, or virtually, based on your preference. Give our office a call and we can schedule some time together.