When it comes to receiving an inheritance, there are countless stories of vast fortunes and assets being squandered away in one generation by unwise and extravagant spending.
It’s only natural for those who have wealth to be concerned about how the next generation will deal with a sudden influx of money received in an inheritance.
Over the years there have been several stories of vast fortunes being squandered within a generation of the patriarch or matriarch passing away.
A Cautionary Tale
The Vanderbilt’s were one of the wealthiest families in American in the late 1800’s. Cornelius Vanderbilt took $100 borrowed from his mother and turned it into a $100 million-dollar fortune by the time of his death.
Within 30 years of his passing, his heirs had squandered almost all of the money they were left. They gave up running the family business and trying to produce wealth and instead enjoyed the good life, spending money and thinking that their inheritance was so vast it would last forever.
Just 50 short years after his death, the children and grandchildren had lost their entire fortunes. In 1973, the living descendants of Vanderbilt held a family reunion. Out of all 120 family members that attended, there wasn’t a single millionaire amongst them.
It’s been estimated that around 70% of wealthy families in America will lose their entire fortune by the 2nd generation, and 90% by the third.1
Around 78% of wealthy people feel that the next generation is nowhere near financially responsible to manage a sizable inheritance. Approximately 64% of people have disclosed very little to nothing at all to their children about their wealth.2
If you find yourself in this position, there are several things that you can do to help protect your legacy.
A sizable inheritance can cause inter-family squabbling and create a situation that can rapidly deteriorate to the detriment of your best interests and your legacy.
However, if you were to create a philanthropic mission, it will instantly connect generations and allow the entire family to communicate and work together for the common good of the foundation you build.
There are several charitable options you can create. A private foundation and donor-advised funds can help bring younger generations together by providing a common goal for the good of others. Since the money is going to those in need outside the family, there is no personal interest at stake.
A charitable remainder trust (CRT) can also help if you choose to donate the majority of your money to a charity so that a smaller inheritance can be distributed out.
Be the Leader
Communication and trust issues amongst family members are the root cause of inheritances being lost in just one generation. As the patriarch or matriarch of your family, you should share your vision and values to guide future generations in their decision-making processes.
You can do this through a simple family get-together or via a written statement (ethical will).
When you share a story and a vision for the future, family members are given the framework on which your legacy can not only be maintained but grow for generations to come.
If you leave your inheritance to one of your children and his/her marriage ends in divorce, their ex-spouse could potentially take a part of the estate if it’s not managed correctly.
A financial advisor can make sure that your inheritance will be safe in the event your children get divorced.
The inherited property or accounts should be titled in the name of your children only – not jointly with their spouse. As time goes on, the titling should remain the same.
Trusts allow you to micro-manage how, where, and when your money gets distributed and spent after you die. Many wealthy individuals with young heirs take advantage of trusts that disperse income only when they reach a certain age such as 21 or 30.
Another option is a generation-skipping trust. You can skip over your children and transfer money tax-free to grand or great-grandchildren.
Have a Conversation with Your Heirs
25% of all cases of lost inheritances are due to woefully under-prepared heirs. A qualified and experienced financial advisor can help secure your legacy through education of both you and your family members.
Wealth management has many essential principles that are sometimes lost on the younger generations. A financial advisor can offer experience, resources, and tools that will allow you to make decisions that are in the best interest of both your immediate and future family members for many years to come.
At Glen D. Smith and Associates in Flower Mound, we can help ensure that your money and legacy will remain for generations to come.
Any opinions are those of Glen D. Smith and not necessarily those of RJFS or Raymond James. Securities offered through Raymond James Financial Services, Inc., member FINRA/ SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Glen D. Smith & Associates is not a registered broker/dealer and is independent of Raymond James Financial Services.