When Stephen Lovell used to visit his grandparents as a kid, it was like entering the world of Cole Porter or The Great Gatsby.
People dressed in tuxedos and sipped cocktails. They owned boats, airplanes, a hobby farm. Not to mention a lavish mansion in Ontario, Canada, and a summer home in Southampton, New York.
He estimates that his grandfather, who founded the John Forsyth Shirt Co, had a fortune of at least $70 million in today’s dollars. But through a combination of bad decisions, bad luck, and alcohol dependency, the next generation squandered that money.
“I think about it all the time,” says Lovell, a financial planner in Walnut Creek, California.
Indeed, 70% of wealthy families lose their wealth by the second generation, and a stunning 90% by the third, according to the Williams Group wealth consultancy.
U.S. Trust recently surveyed high-net-worth individuals with more than $3 million in investable assets to find out how they are preparing the next generation for handling significant wealth.
“Looking at the numbers, 78% feel the next generation is not financially responsible enough to handle inheritance,” says Chris Heilmann, U.S. Trust’s chief fiduciary executive.
And 64% admit they have disclosed little to nothing about their wealth to their children.
The survey lists various reasons: People were taught not to talk about money, they worry their children will become lazy and entitled, and they fear the information will leak out.
When I asked financial planners why the wealthy are so poor at passing along money smarts and why second- and third-generation heirs turn out to be so ham-handed, the answers were surprisingly frank.
A sampling: “Most of them have no clue as to the value of money or how to handle it.” “Generation Threes are usually doomed.” “It takes the average recipient of an inheritance 19 days until they buy a new car.”
Yes, the statistics may be grim. But just because most wealthy families see their fortunes evaporate within a couple of generations does not mean yours will. Some strategies to avoid it:
Talk Early and Often
You may think you are encouraging hard work by not disclosing wealth to your kids, but that really just fosters ignorance.
If you have just never talked about money, get over it, and give your kids a crash course in financial literacy. Many financial institutions, including U.S. Trust, offer specialized learning materials and courses to get heirs up to speed.
That goes for grandkids, too: Instill smart money lessons in them, and you have pushed family wealth forward another 30 or 40 years.