Posted on January 31, 2018
The transference of family wealth has long presented a challenge for families. Over time, and in many different cultures, it has been called many things. You may have heard the proverb, “Shirtsleeves to shirtsleeves in three generations.” In Japan, the expression goes, “Rice paddies to rice paddies in three generations.” The Scottish say, “The father buys, the son builds, the grandchild sells, and his son begs.” In China, “Wealth never survives three generations.”
Regardless of how you phrase it, only 30% of affluent families are able to transfer wealth to the second generation, and only 10% percent to the third. Worldwide, there is a 70% failure rate in wealth transitions – regardless of country, tax laws, or economic cycle.
This leads us to ask – what causes such an epidemic chipping away of family wealth?
Family dynamics – how family members interact with each other individually and with the family as a whole – is the largest single factor in the long-term success or failure of wealth transfer.
Over the next 50 years, we will experience the largest intergenerational transfer of wealth in history. In the coming decades, between $41 trillion and $136 trillion will pass from older Americans to younger generations, suggesting that roughly $1 trillion to $3 trillion in wealth will change hands every year.
These statistics are alarming for many reasons. In the coming decades, vast amounts of wealth will be transferred to family members who, by and large, are unprepared to manage it. This overwhelming failure to transfer wealth beyond the second generation represents an inability to preserve and pass on a family’s legacy.
So, what can a family do to prevent this? Once a family understands the factors that contribute to a successful transfer, as well as those that contribute to failure, they can begin to focus their attention and energy to effect change. Initiating communication is the critical first step, and we discuss how to get started in our recent commentary titled Wealth Continuity: An Heir-Raising Experience.
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