“How did you go bankrupt?"
“Two ways. Gradually, then suddenly.”
--The Sun Also Rises, Ernest Hemingway
Passing wealth along to future generations is a fundamental aspect of financial management. While the hope for that to happen is there, a study by Merrill Lynch as reported by Reuters shows how reality paints a different picture:
- 70 percent of survey respondents want their money to last beyond their lifetime, but that same group also had an unreasonable expectation of making the money last.
- 40 percent of individuals surveyed say it's never too early to start discussions about finances with family, but far fewer do it.
- 20 percent have no idea what level of distribution would keep them comfortable forever.
- Only 16 percent correctly pegged a distribution rate in the range of 1-3 percent per year for sustainable wealth.
A Lack Of Trust And Communication
An article from Money Magazine tells a similar story, citing that “70 percent of wealthy families lose their wealth by the second generation, and a stunning 90 percent by the third.”
At the heart of it appears to be a trust and communication issue, with 75 percent feeling that the next generation isn’t financially responsible enough to handle inheritance, and 64 percent reporting they have “disclosed little to nothing about their wealth to their children.” Some general reasons given as to why heirs aren’t in the family financial loop:
- People were taught not to talk about money
- They worry their children will become lazy and entitled
- They fear the information will leak out
History Lesson: The Vanderbilts’ Shipping and Railroad Empire
When adjusted for inflation, "Commodore" Cornelius Vanderbilt left more than $100 billion to his heirs when he died in 1877. At a family reunion in 1973, of the 120 Vanderbilt descendants in attendance not one was a millionaire.
Granted, some of the Vanderbilt heirs could spend money quite deftly, it goes to show how even the largest of fortunes can one day evaporate if not responsibly managed and occasionally replenished by future generations. [Source: The Wall Street Journal]
But Wait, There’s Hope...
The way to reverse this trend, or at least mitigate it a little, is recognizing the behaviors that created it in the first place. The takeaways from an interview Reuters conducted with the Merrill Lynch co-author revealed these fascinating tidbits:
- People tend to be overly generous and give their family members too much without any accountability.
- As families grow from generation to generation, there’s less money to go around so you have to be explicit over how you want the money used.
- Don’t confuse a discussion about wealth (broad topic) with one about dollar amounts (specific topic).
- Have an understanding of your heirs’ spending behaviors when deciding “who gets what.” While you might want to split an estate equally among heirs, you could put parameters and restrictions on how the money is distributed so it can last longer.
Money Magazine says ignoring or avoiding the topic is the wrong approach, as is not discussing the Will or offering a “financial roadmap in the form of a family mission statement.” Get everyone involved in the discussion, including grandchildren, so a sense of financial literacy and responsibility is properly instilled.
Pros, Please Lend Us A Hand
Here at Everplans we’re interested in capturing real voices and sound advice from experienced experts to help educate the world about planning. If you can offer any insight into the following areas, don’t hesitate to get in touch with us:
- Is this a concern you've had to face?
- What advice or guidance would you give to help a client avoid these issues?
- Is this something you are comfortable proactively discussing?
- Do you think an advisor plays a key role in helping a family create a financial roadmap?