The fact that family wealth rarely survives through more than three generations is a belief that spans the globe and almost all of recorded history.
“There’s nobbut three generations atween a clog and clog.” —Old English proverb
“Wealth never survives three generations.” —Chinese proverb
“From stalls to stars to stalls.” —Italian saying
“The third generation ruins the house.” —Japanese proverb
“Shirtsleeves to shirtsleeves in three generations.” —American proverb
“First generation, trader; second generation, gentleman; third generation, beggar.” —Spanish proverb
All the old proverbs and sayings deliver the same message: generational wealth seems to have a clear pattern.
In fact, the proverbs describe how the first generation starts without wealth and possibly without education. The greatest opportunity for those in this generation is to be entrepreneurs and work hard, which they do.
Along the way, they don’t change their values or lifestyle. Like all parents, they want a better life for their children, so the second generation is well educated and has a choice about careers. Their parents worked in shirtsleeves, but the children go to work in jacket and tie.
The offspring see the sacrifices their parents made to amass the family fortune, and they know their parents want them to have a better, easier life. So, they adjust their lifestyle accordingly. The family fortune plateaus in the second generation.
The third generation, raised with all the spoils of wealth, does not witness the amount of work and sacrifice it took to build the wealth, so the third generation consumes the family fortune, and the fourth generation goes to work in shirtsleeves again.
Is “clogs to clogs in three generations” an unbeatable course?
Even if this concept of the three-generation wealth cycle is supported by research that shows approximately 70% of wealthy families lose their wealth by the second generation and an incredible 90% by the third*, there are many wealthy families that have passed their wealth down to the younger generations for over 150, or even 200 years. For example, the Rothschilds from the finance industry, the Rockefellers in the oil business and the Guggenheims in mining.
So how to protect the legacy and family wealth for generations to come?
There are two key steps that every family should take to successfully transfer their wealth from generation to generation.
As James E. Hughes in his book ‘Family Wealth – Keeping it in the Family’ suggests, “to successfully preserve its wealth, a family must form a social compact among its members reflecting its shared values, and each successive generation must reaffirm and readopt that social compact.”
All generations need to be connected to the family and the family’s values. In fact, it is difficult to prevent the “shirtsleeves” proverb from becoming reality if a family is connected only by money.
Families need to come together on a regular basis and be reminded of who they are, where they come from, how they are unique, and how any differences can benefit the future generations of the family.
This, together with sound financial education, should properly equip potential heirs with the skills, values and direction needed to handle a sudden and significant amount of wealth.
Planning is often considered too late, leaving no opportunity for first generation entrepreneurial/investment talent to be passed on and developed. Successive generations may be unable to make good decisions and, at best, may only maintain wealth rather than continuing the growth or, at worst, lose wealth through poor investment and management.
In this scenario, a well thought-out and executed wealth transfer plan is key to protect and preserve wealth for the future generations. How to go about this is a personal decision and a complex one.
There is no one-fits-all solution; the details of any estate planning will depend upon the wealth holder/ creator’s goals and the specific circumstances of the family.
For example, the assets owned by a family may span various jurisdictions. The type of entity in which assets may be held and in which jurisdiction the structure should be set up need to be carefully considered from the outset. Choosing the right type of entity in the most suitable and appropriate jurisdiction can be confusing, with the wrong choice significantly impacting the structure’s success.
Contacting a professional trust and corporate services provider, such as AbacusLandmark, is a good start on the road. With extensive experience and deep knowledge in our field, we can offer information and advice on a diverse range of structures as well as assistance in the establishment and development of a tailored solution.
We are committed to help preserve wealth through the establishment of effective solutions, placing great emphasis on considering the entirety of assets and how a planning solution will work in the context of these together with the family dynamics.
By properly preparing from both a personal and financial standpoint, you can help your family avoid the stereotypes of shirtsleeves to shirtsleeves and instead create a lasting legacy for good.
How long will your legacy last? Will it survive for hundreds of years or will it be lost in three generations? The choice is yours.