It sounds counterintuitive but words rather than numbers are likely to dictate the success of your family’s transfer of wealth. Most people turn to a financial advisor simply for a tax-efficient estate plan to ensure their heirs inherit as much as possible. But what good is that if the next generation are ill-equipped to deal with it, either because the money comes as a surprise or because they’re too entitled to handle such a windfall?
Crunching the numbers is table stakes but at Private Financial Group, we also help prepare your children and/or beneficiaries for the responsibility that comes with wealth. A lack of communication, transparency, shared family values, and gratitude can wipe out a fortune in one fell swoop. The adage “shirtsleeves to shirtsleeves in three generation”, which refers to the failure of grandchildren to manage the wealth passed down to them from their grandparents and parents, is much used for a reason.
The contrasting results of two families1 who accumulated riches in the 19th century highlight this issue. Take American Cornelius Vanderbilt, who left 95% of his estate to one son, and divided the rest among his eight daughters and his wife, leaving a tiny portion to charity. One sibling later killed herself as the dispute over the inheritance spiraled out of control, while the remaining Vanderbilts soon acquired a reputation for self-gratification and lavishness. While Cornelius was adept at the “two-legged stool” of estate and financial planning, he notably failed to prepare his heirs to handle one of the world’s biggest fortunes. When the Vanderbilt family held a reunion in 1973, there were no millionaires left.
Over in Europe, the Rothschild family built a similar fortune but the patriarch, Sir Nathan, was shrewd enough to add another leg to the planning model called Heritage Design, which readied the heirs to receive their inheritance. This philosophy included establishing family “banks” to lend money to, and monitor, those who wish to start businesses, while annual family gatherings clarified and communicated their collective vision for the future. Philanthropy was supported and, apparently, if a gathering was missed, that family member was locked out of the family bank. This unified approach has kept the family wealthy up to the present day.
The Rothschilds’ success bucks the trend. According to much-cited studies by Victor Preisser and Roy Williams in their book “Preparing Heirs”, almost 70% of wealth transfers fail, which is arguably more significant now than at any other time in history. Through 2045, parents of Boomers, and Boomers themselves, will pass down about US$84.4 trillion in assets, with US$72.6 trillion going directly to heirs, according to Cerulli and Associates2. This will change the lives of Millennials. Suddenly, having endured high real estate prices and recessions, they will have the ability to purchase homes, pay off student debt, travel, and buy high-end products. Having previously been sheltered from such money decisions, they will hold five times as much wealth as they do today by the 2030s3. Shirtsleeves to shirtsleeves perils abound.
Therefore, just as Sir Nathan Rothschild realized, your heirs don’t just need a financial plan, they need guidance and mentoring.