The inheritance conundrum
In the latest in a series of articles for CampdenFB, experienced family office professional Giles Graves asks why does wealth frequently fail to survive beyond one generation?
I have worked with families who have been wealthy for a thousand years and with entrepreneurs who have been wealthy for one.
From most peoples’ perspective, in an ideal world, wealth is a legacy passed down through generations, ensuring financial security for descendants for years to come. The benefit of this is that assets such as land and homes and art and antiques can be curated over very long periods and therefore nurtured, protected and preserved, sometimes for the nation to enjoy (as any UK capital gains tax geeks who are reading this, will know well).
Losing wealth can destroy a family and the harsh reality is that wealth, more often than not, dissipates within a single generation. This phenomenon raises a crucial question: why does wealth frequently fail to survive beyond one generation?
1. Failure to Create Income
Overreliance on a single asset or investment strategy can spell disaster for inherited wealth. Without diversification, inheritors are vulnerable to market fluctuations and economic downturns that can significantly impact their financial standing. Diversifying investments across different asset classes can help mitigate risk and safeguard wealth against unforeseen challenges.
Alex Felman of Felman Family Office and next generation education program Exponential U makes a good point to me recently in this area. He describes the conundrum as a family office version of the innovator's dilemma.
“Families can get so attached to what made them money in the first place that they don't go after innovation that moves away from these areas. Next Gens often want to be the drivers of these new ventures. This causes generational tension.”
2. Lack of Financial Literacy
One of the primary reasons wealth fails to endure is the lack of financial literacy among inheritors. Without the necessary knowledge and skills to manage and grow wealth, inheritors may make poor financial decisions, leading to its depletion over time. Financial education is crucial in teaching individuals how to budget, invest, and plan for the future effectively.
3. Entitlement Mentality
Inheriting substantial wealth can sometimes breed a sense of entitlement among beneficiaries. Instead of viewing their inheritance as a privilege to be stewarded wisely, some may see it as an unearned windfall, leading to reckless spending and irresponsible financial behaviour. This entitlement mentality can quickly erode the wealth accumulated by previous generations.
4. Overspending and Lifestyle Inflation
When individuals suddenly come into a significant inheritance, they may succumb to the temptation of overspending and lifestyle inflation. Upgrading to a more lavish lifestyle, indulging in luxury purchases, and excessive spending can drain wealth rapidly, leaving little to sustain future generations. Without prudent financial planning and discipline, the cycle of overspending can perpetuate, ultimately leading to financial ruin.
5. Lack of Long-Term Vision
Successful wealth preservation requires a long-term vision and strategic planning. However, some inheritors may lack the foresight to make prudent financial decisions that prioritise the sustainability of wealth over immediate gratification. Without a clear understanding of the importance of preserving wealth for future generations, inheritors may squander resources on short-term gains, jeopardizing its long-term viability.
6. Inadequate Estate Planning
Effective estate planning is essential for ensuring the smooth transfer of wealth from one generation to the next. However, inadequate estate planning or the absence of a clear succession plan can lead to disputes, tax liabilities, and mismanagement of assets, ultimately diminishing the value of the inheritance. Seeking professional guidance to develop a comprehensive estate plan tailored to individual circumstances is crucial for safeguarding wealth for future generations.
7. Family Dynamics and Interpersonal Conflicts
Inheritances often come with complex family dynamics and interpersonal conflicts that can complicate wealth preservation efforts. Sibling rivalries, disagreements over financial decisions, and disputes regarding inheritance distribution can undermine efforts to sustain wealth beyond one generation. Open communication, conflict resolution, and fostering a sense of unity and shared responsibility within the family are essential for overcoming these challenges.
8. Lack of Financial Discipline and Accountability
Without accountability and discipline in managing inherited wealth, inheritors may fall prey to impulsive financial decisions and irresponsible behaviour. Establishing clear financial goals, monitoring spending habits, and holding oneself accountable for financial decisions are critical for preserving wealth and ensuring its longevity across generations.
In essence, the failure of wealth to survive beyond one generation can be attributed to a myriad of factors. Overcoming these challenges requires a concerted effort to educate inheritors, instil prudent financial habits, foster open communication within the family, and seek professional guidance in estate planning and wealth management. By addressing these issues proactively, families can increase the likelihood of preserving wealth for future generations and building a lasting legacy of financial security and prosperity.
