From time to time one reads on the board about intergenerational wealth being a large problem. Is that a feature or a bug? As the saying goes, “you only need to get rich once.”
However, it appears to be difficult to make that wealth last.
While many families accumulate substantial wealth within a single generation, preserving that wealth across multiple generations proves significantly more difficult. Studies consistently show that a large percentage of affluent families lose most of their wealth by the second or third generation.
70% of wealthy families lose their fortune by generation two. 90% lose it by generation three…The Vanderbilt family provides a clear example. Cornelius Vanderbilt left the equivalent of over $100 billion (adjusted for inflation). By 1973 [95 years later] at a family reunion with 120 descendants, not one was a millionaire.
The lasting effect of intergenerational wealth transfers: Human capital, family formation, and wealth
Benton et al. https://www.sciencedirect.com/science/article/abs/pii/S0049089X17302788 Recent evidence indicates that inheritances and other intergenerational wealth transfers have only a limited effect on wealth inequality and the intergenerational transmission of financial well-being.
Chinese adage: Three generations rich, fourth generation poor.
Proverbs 13:11 states that “wealth gained hastily will dwindle, but whoever gathers little by little will increase it.” Sometimes translated as “by vanity.” It it would apply to heirs who didn’t absorb the work ethic of the great-grandparents who established the fortune and fritter away an un-earned inheritance. (Would also apply to people who win the lottery, etc.)
Yes, there is a Scottish version of this, too (as in most cultures): “The father buys, the son builds, the grandson sells, and his son begs.”
The American landscape is strewn with bodies of many 3rd and 4th generation heirs who squandered or mismanaged their legacies, whether its the Vanderbilts, the Dukes, the Hearsts, the Gettys…well you get the picture.
A common thread across these cases: the wealth-destroying generation is usually the third, since the first generation creates the wealth and understands its cost, the second generation works alongside the founder and absorbs some of that discipline, and the third generation often grows up only knowing consumption, not creation.
Dad was born on a dirt farm that had been in the family since the mid-1600’s and lost in 1929 when he was 7. Thanks to WW II and the GI bill, he was able earn a combined college and law degree, marry, support a family, and practice law in a small town setting for about 60 years. He set two examples that I am emulating. 1.Work hard, save and invest while also enjoying life; 2. Tell your children to work hard, save and invest while also enjoying life, because our education was our only inheritance.
I was 59 when Dad died. By then I had practiced law for 35 years, worked hard and saved and enjoyed life while also living within my means. Because of that, my modest inheritance was meaningful. It increased our net worth enough to allow me to retire at 63 and live well but within my means while continuing to save for my children.
They are in their 40’s now, living well but also saving and investing, and may be able to retire and live well if they do the same.
You have to do both. Work hard and save and teach your children to do the same on their own throughout their working lives.
Then even if you fail for some reason, they have laid the foundation by following the same path as the prior generations.
The Mars family are into the fourth generation and still doing well. They pushed the kids to work in the businesses, in the factories. I’ve worked alongside a couple of family members in pet food plants. No heirs or graces. Hard workers.
I rec’ed your post but the primary reason the Mars family are retaining and growing their wealth at an astronomical rate is that they are on the vanguard of multi-billionaire families who have persuaded Congress to keep tax loopholes in place that allow them to inherit hundreds of billions of dollars tax free:
In principle wealth can last for generations when invested wisely and the family is willing to live on the interest. Bad investments and big spending can mean doom. Competitive spending to outdo someone else or impress people can be disaster. Strong advisors probably help.
Stories are told of those who spend freely and end up bankrupt in spite of a healthy trust fund. Stupidity is difficult to cure.
While in college I had a few friends from very ,wealthy ”established” families. They explained to me that their great grand parents, more or less, created specialized law and accounting firms to do thewhatever was necessary to maintain wealth over time from idiot heirs, and from changes in laws and taxes.
Once assets are in a trust they can grow there forever. Getting assets there within the estate tax exemption is a problem. The limits are clear. A billion dollar gift to a trust will be taxed. Gifts to others will be taxed. Many loop holes have been closed.
We had a thread about this before (which I can’t find). Anyway, there was a big census back in Florence in the 1400s for tax purposes, which recorded everyone’s name and wealth. Italians in that region have hyper-local surnames, so it was possible to find their descendants in the 21st century.
Turns out the descendants of the top 90% in the 1400s today have a significant wealth advantage over the average Italian, and tend to have prestigious professions. Similar studies since been conducted elsewhere (China, England, Sweden, Spain), and found similar results. In the United States, it was found the families of wealthy Dutch merchants who founded New York tended to remain wealthy for centuries, like the Roosevelts and Vanderbilts.
Familial wealth does tend to dissipate over time, but there is surprisingly little social mobility, even in countries like Sweden. Even after revolutions and wars, wealthy families tend to remain wealthy.
Interesting, if a family loses its wealth they tend to gain it back. This leads to speculation part of this is behavioral. Parents install values that lead to economic success in the children, who pass it on to their children, and so on.
Many of us have trusts. Sometimes to reduce estate taxes. Assets that grow in an irrevocable trust are not part of the estate and can grow free of estate taxes. But also high income tax rate and no stepped up basis.
Putting funds in the trust reduces your estate taxes exemption. Currently $15MM for singles or $30MM for couples. No you cannot put billions into a trust tax free. You pay gift tax starting at 40% once you deplete your unified estate tax exemption.
You can gift up to $19K per individual per year but above that same deal. Excess depletes your exemption and when used up is taxed at 40%.
The loopholes you describe have been closed. Once you cross the $15MM line in an estate the tax man waits at every door.