Only about 10% of families can expect their wealth to last beyond their grandchildren’s generation. [1]
That was one of the findings of a widely cited study from the early 2000s, which followed 3,250 families over 25 years. On average, a staggering 70% of a family’s wealth was gone by the second generation.
Poor planning, insufficient communication, and lack of financial education are among the key reasons a family’s wealth can be so vulnerable across generations. In the absence of clear and persistent communication between generations about the value of wealth to the family and the fiscal responsibilities that come with it, beneficiaries may struggle to manage their newfound wealth effectively. This can lead to financial mismanagement, strained intra-family relationships and sometimes reckless behavior.
Unfortunate outcomes are so common within families that there’s even a term for it: “Sudden Wealth Syndrome.”
“Sudden Wealth Syndrome” can manifest in various ways, including overspending, excessively risky investing or a sense of entitlement that disconnects the wealth from the work it took to create it. Any or all of these factors can lead to the erosion of family wealth over time.
The good news is that careful planning and effective communication are tools a family can use to mitigate the risk of “Sudden Wealth Syndrome.”
The first step is to gain a deeper understanding of what wealth means to the family and how the family hopes future generations will manage it. Importantly, these ideas and values should be documented and put in place well before any assets are transferred.
I would add an important note here, however, that plans for how the family’s wealth should be spent, invested or preserved should not be one-sided. Future generations should have a voice in these planning conversations so their passions, ideas and views on wealth can help shape the family’s vision.
Done right, these planning conversations—which should take place continuously over time—will result in clear expectations regarding the family’s wealth. Whether funding education, starting a business or supporting charitable causes, outlining these priorities helps future generations align their actions with the family’s values.
These planning conversations will also illuminate gaps that need filling, such as financial literacy training or establishing communication channels to resolve disputes. By giving heirs knowledge and tools, families increase the likelihood of informed decisions while decreasing the risk of impulsive or misguided behavior.
Education is also critical. Future heirs must be equipped with knowledge needed to manage and preserve wealth effectively. This education might be through family-run workshops, personal financial mentorship from older generations or engaging with professional financial educators. Involving financial professionals is often key, as it establishes open channels of communication and a process for weighing ideas and answering questions—precisely what’s needed to avoid the pitfalls of “Sudden Wealth Syndrome.”
Fostering a sense of stewardship is also critical. When heirs understand the legacy and the effort behind the family’s wealth, they are more likely to approach it with care and thoughtfulness. Sharing family stories, the origins of wealth and the values that helped build it can create an emotional connection that inspires deliberate, responsible and goal-oriented financial management.
In some cases, it may become apparent that ‘guardrails’ are needed to protect the wealth over time. A family may determine that it is important to set boundaries and limitations to prevent excessive spending and encourage responsible financial behavior. Trusts can be useful in these cases, as they can create rules, distribution schedules and other checks and balances that support the family’s long-term vision.
In managing wealth for sustainability, financial structures such as trusts and estate plans can ensure protection and growth of family assets. For families with substantial wealth, establishing a family office can centralize the management of assets, coordinate estate and tax strategies and oversee philanthropic endeavors. This can be a formidable structure, fostering unity and aligning interests toward the family’s vision.
Beyond these important legal documents and structures, families should also consider drafting a family wealth mission statement. This statement can serve as a guiding light for current and future generations, embodying the family’s collective ethos and objectives regarding their wealth.
Transferring wealth across generations involves great responsibility, not only for the generations inheriting the wealth but also for the family members responsible for passing it on. Proactive planning is needed to mitigate risks, but it’s also the key to helping a family make the most of the immense opportunities that come with proper wealth management.
Working with a knowledgeable financial planner can bring clarity to a family’s wealth transfer plans and ideas. It’s all about fostering open communication, providing financial education, setting clear expectations and putting structures in place to fulfill a family’s vision.
[1] https://www.anz.com.au/private-banking/insights/how-to-beat-the-three-generation-curse/
IMPORTANT DISCLOSURES
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. In addition, information presented in this presentation is believed to be factual and up to date, but Newport Capital Group, LLC does not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed.
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