Dividing Up Your Trophies

By |2024-04-30T13:04:37-04:00April 30th, 2024|Blog, Valuables|

Note: This is the first post in a series where we’ll talk more about the topic of Legacy Planning, offering actionable advice on how to successfully pass on not just your wealth but, more importantly, your values to the next generations.

I recently wrote a blog post discussing the topic of “estate planning” as most people define it. For most successful people and their advisors, estate planning is all about how you can share all of the financial assets you’ve earned and created with the next generation. When we talk about estate planning now, you hear a lot of euphemisms, but let’s keep it simple for you:

 What is Estate Planning?

It is the process by which financial planners and attorneys use various sophisticated tax, insurance, and estate planning strategies to help you leave a whole bunch of money to your kids and grandkids.

However, as this blog post explains, this process ignores the importance of passing on something of much more value than your financial capital — your values. Imagine if Tiger Woods spent all of his time planning how to bequeath his son, Charlie, with all of his golf clubs and championship trophies … instead of teaching Charlie how to expertly swing a golf club so that he can win those trophies for himself.

For many wealthy individuals and their advisors, the priority is simply maximizing the amount of money that is passed on. Estate planning is nothing more than a process of making a plan for dividing up all of the golf clubs and the trophies among your descendants. Often, little thought is given to what comes next or what true legacy means. And there’s an unfortunate reality to what typically happens next.

Shirtsleeves to Shirtsleeves in Three Generations

A popular maxim is that families go from “shirtsleeves to shirtsleeves” in three generations, meaning that most family fortunes are squandered two generations after they are built. In fact, the Family Firm Institute (FFI) in Boston — the leading association worldwide for professionals serving the family enterprise field — estimates that less than five percent of all family wealth and enterprises survive to the fourth generation and beyond.

Let’s talk a little bit about how that can play out.

The original wealth creator, in this case, the grandparent, develops the knowledge, skills, motivation, responsible work ethic, and thrift to create financial wealth beyond the immediate needs of the family. Over their working life, they generate enough wealth for their heirs. When they pass, their wealth is bequeathed to the next generation.

The wealth creator’s children do okay. Because of their proximity to the wealth creator, the second generation of family members often learn and retain some — but not necessarily all — of the values, skills, and work ethic that built the family fortune. However, this learning often happens in a haphazard or incidental way, so these values are often diluted. Almost always, the second generation doesn’t feel the same pressure to work hard, save money, and spend prudently.

The third generation is where things tend to fall apart. In most cases, this generation has only known wealth and privilege and has never had to watch their family struggle or work hard. They often don’t feel the same burning desire to work hard and succeed, accustomed only to abundance. Spending habits can become out of control, as family members often don’t see a need for frugality. And, with each generation, the wealth dissipates into a wider network of relatives, making it more difficult to manage and prone to competing interests and resentment. It gets … messy.

Wealth and Happiness

It’s sad to say that passing on great wealth can have tragic results for wealthy families, and I’m not just talking about the loss of money. In addition to losing wealth, it also prevents the third generation from being truly happy and feeling as if they have talents to contribute. The unintended consequences of inherited wealth can include laziness and loss of motivation, incapacity to work hard and produce income, mental health issues, depression, suicide, alcoholism, di