How to beat the Midas curse
Nine out of 10 affluent families will lose their wealth by the end of the third generation. So how can families hang on to their money?
Whenever Rodney Zeeb gives talks on financial planning, he asks his audiences if they know the perils that arise when heirs are ill-prepared for an inheritance. Each time, nearly all heads nod, and hands shoot up: Yes, yes.Skip to next paragraph
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"Almost everybody knows a family or has seen a case where the money hurt somebody in the family, or the kids or grandchildren blew it all," says Mr. Zeeb, an attorney and coauthor of "Beating the Midas Curse," a reference to the destructive relationships with money that splinter some families.
So widespread is the problem, that 6 out of 10 affluent families will lose the family fortune by the end of the second generation, Zeeb says. And 9 out of 10 will have depleted the family wealth by the end of the third generation.
It's a modern-day drama summed up in an ancient Chinese adage: "Wealth never survives three generations." Nineteenth-century Americans updated it to read, "From shirtsleeves to shirtsleeves in three generations."
These sobering realities raise a question: How can families plan their estates across generations and reduce the chances that money will be squandered?
That question promises to grow more urgent as baby boomers receive inheritances and plan their own estates. The next 50 years will bring the greatest transfer of wealth in history, experts say. At least $41 trillion will pass to the next generation by 2044, estimates Paul Schervish, director of the Center on Wealth and Philanthropy at Boston College.
To help families make successful transfers, some financial advisers are quietly broadening their approach. They are part of a fledgling movement urging families to focus on passing on values as well as valuables to successive generations. "That's where parents typically fall down," says Paul Binnion, vice president of Clark Capital Management Group in Philadelphia. "They just pass the money without passing the values involved in its creation."
Stuart Lucas, a fourth-generation heir to the Carnation fortune, offers a cautionary note: "If you transfer wealth to the next generation without preparing them, it's bad for them, and it gnaws at the fabric of a vibrant and productive society."
Yet preparation can be hard. Out of love for their offspring, parents can unwittingly sow the seeds of later inheritance problems by trying to spare their children the hard work that contributed to their own financial success.
"They want their kids to have an easier life than they had," says Jim Huller, a principal at Maximum Wealth Advisers in Roanoke, Ind. "They kind of neglect letting them learn things the hard way - doing without things, making some sacrifices." That can foster an easy-come, easy-go attitude toward money that most parents never intended.
"If you ask a wealthy parent, a husband or wife, 'Do you want your wealth to corrupt your kids?' there wouldn't be a parent on earth who would say 'yes,' " Mr. Binnion says.
He and others see communication as the start to a solution. Yet Binnion finds money to be "one of the most taboo subjects" in wealthy families.
"Most parents don't want to talk to their kids about money," Mr. Huller says. "And our schools do a terrible job about training us to manage money."
Still, at the other end of the age spectrum, signs of change are appearing. A survey by The Hartford notes a distinct generation gap in how baby boomers and their parents see issues of inheritance and estate planning. Three-quarters of parents in their 70s say they are very comfortable talking about their estate. But less than half of the children feel comfortable having this kind of conversation. The study also finds that baby boomers underestimate the importance their parents put on providing for their heirs, improving their children's lives, helping their children prepare for retirement, and helping grandchildren attend college.