April 28, 2023
Protecting Generational Wealth
Money Talk for Families

For anyone who has built a significant level of wealth, now is the time to ask yourself this important question: How long will the wealth I’ve accumulated really last? Assuming you maintain a focus on growing and protecting your assets, it’s unlikely your wealth will dwindle within your own lifetime. But what about the next generation? Do your children and your children’s children have the knowledge and aptitude to expand your legacy, or are they doomed to fulfill the prophecy of “shirtsleeves to shirtsleeves in three generations?”

As disheartening as that adage may be (thank you, Andrew Carnegie), it illustrates the importance of equipping future generations with the tools they need to successfully manage the wealth passed down to them from their grandparents and parents. Considering that trillions of dollars are slated to be handed over to the next generation within the next three decades, taking steps to ensure these beneficiaries have the knowledge and tools to make wise money decisions should be at the top of every family’s list of financial priorities.

Last year, Bank of America surveyed more than 1,000 individuals who hold $3 million or more in investable assets. One unsurprising result of the survey was that nearly 70% of these wealthy individuals were 56 or older—all either Baby Boomers or older who have had many decades to build their wealth. What did come as a surprise is that just 27% of those surveyed are ‘self-made,’ meaning that they came from middle-class or poor households and received no inheritance from their families. Of the remaining 73%, nearly half (46%) reported either receiving some amount of inherited wealth or coming from an affluent upbringing, and 28% reported the great advantage of ‘legacy wealth’, meaning that they benefitted from both inherited assets and an affluent family background.

While it’s clear that inheriting assets and coming from a family with wealth can provide major financial advantages, there are limits to these benefits. Sources report that about 70% of wealthy families lose their wealth by the second generation, and 90% lose their wealth by the third generation. Shirtsleeves to shirtsleeves, indeed. In today’s culture, that shift has the potential to accelerate thanks to changes in how younger generations view investing. Though there has never been a shortage of get-rich-quick schemes (nor of people willing to take great risks to reap potential rewards) technology seems to be making it more tempting than ever to jump on the bandwagon of the next ‘sure thing.’ That’s a very real issue when it comes to protecting next-generation wealth.

According to the Bank of America survey mentioned earlier, wealthy investors who are self-made hold higher percentages of stocks in their portfolios. In contrast, younger investors with inherited wealth are more skeptical of these traditional assets, and are driving up demand for higher-risk investments such as cryptocurrencies. What this shows is that the method in which people became wealthy impacted their viewpoints about investing, including the level of risk they are willing to take and, ultimately, their financial outcomes over time. The best way to shift this reality is to proactively communicate your financial values and lessons to the next generation. Here are 3 steps that can help:

  1. Have ‘the money talk’
    Our culture has taught us not to talk about money. That taboo may be one reason so many families lose their wealth within just two or three generations. Now is the time to close the gap. Set aside time to talk to your children and grandchildren about money. Educate them on your personal philosophies about investing, saving, risk, and philanthropy. Share personal stories about times when you’ve succeeded, times when you’ve failed, and how you overcame your own financial challenges and achieved your financial goals. Welcome their questions and offer guidance to help them grow and protect your family legacy.

  2. Honor your differences
    It may be true that your children or grandchildren haven’t experienced the same level of hard work that you did. If you were able to accumulate wealth before your children were grown, it may also be true that they never needed to be hyper-focused on money. To avoid falling into the trap of seeing this as a fault, take pride in what you’ve been able to provide your family and strive to recognize and appreciate your differences. This can help you understand their unique perspectives—and give you insights to better communicate your own points of view.

  3. Facilitate financial literacy
    To protect your wealth long after you’re gone, find ways to educate younger generations to help them make the best possible financial decisions in the future. With the growing focus on financial literacy, there are now many great books on financial planning and investing that can serve as a great starting point. Think and Grow Rich, Rich Dad Poor Dad: What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not, and I Will Teach You to Be Rich are all classics that can help the next generation begin to think more deeply about money. To take financial education a step further, call us to schedule a family meeting.

Deloitte has projected that Baby Boomer wealth will reach an astounding $26 trillion by 2029—the majority of which will be handed down to the next generation within the next three decades. If your own next generation is among that fortunate group, start taking steps now to protect your legacy and ensure “shirtsleeves to shirtsleeves in three generations” is not an adage that proves true for your own family. Our team at LCM is happy to help.


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