How to beat the three-generation ‘curse’

Most New Zealanders hope to see their children and grandchildren enjoy long, fulfilling lives and do better financially than they did. Being able to pass along wealth is a tangible way for some New Zealanders to leave a legacy.

But how lasting will that legacy be? Not as long lasting as you might expect. About 70% of a family’s wealth is lost by the second generation, and by the third generation it’s 90%, according to a widely quoted longitudinal study of 3,250 families conducted over 25 years by US wealth consultancy The Williams Group in 2002¹. 

In simpler terms, this research shows that only one in every 10 families can expect to see their wealth last beyond their grandchildren’s generation.

There are a few theories for this widespread phenomenon from the first generation failing to get their estate planning in order, to the third generation being clueless about money. Regardless of the reason, one thing is certain: anyone hoping to make their wealth last more than three generations needs to plan.

This rapid erosion of wealth is so well known that it has its own Chinese proverb: “Wealth doesn’t pass three generations.” It’s also spawned a saying in English: “From shirtsleeves to shirtsleeves in three generations.”

So why does this happen with such frequency? 

One theory is that each subsequent generation has less understanding of the work involved in building and maintaining wealth than the previous one. 

The generation that first builds their wealth does so through grit and determination. In pulling themselves up by their bootstraps, they understand the value of their work and wealth more deeply.

The next generation still has some idea of the trials their parents went through to build the family’s wealth. They may have childhood memories of the long hours and dedication of their parents to get ahead. Although they’re accustomed to a better quality of life, they know that wealth isn’t cheap and are relatively savvy with their money.

The third generation, however, will have grown up exclusively in the lap of luxury and have no reference point for the labour of their parents and grandparents. As a result, the value this generation places on money and wealth are significantly less than those who came before².

Some families have successfully broken this ‘third-generation curse’ to create truly lasting wealth for their heirs. So how did they do it?

A common characteristic among these institutionally wealthy families is that they see themselves as custodians of their family’s assets. Although they benefit from this wealth, it’s not exclusively theirs. Instead, this wealth is part of a larger legacy that they have a duty to maintain³.

Importantly, they’re also more likely to plan – and plan early.

One of the biggest challenges that families who are newly wealthy face is that the entrepreneurial mindset – which may have helped them build their wealth – doesn’t lend itself to estate planning.

Wealth creators often find success because of their focus on, and commitment to, their business, rather than a dedication to making money. They are often willing to take risks for the right rewards, and back themselves to make the right decisions.

Making wealth last, on the other hand, requires giving some attention to the wealth itself, not just the work which created it. And while it’s reasonable to take on some risk when managing a portfolio, these risks may not be as great as an entrepreneur might take with their business.

It can also be difficult for these wealth creators to acknowledge their own mortality. Some believe they still have decades to plan their wealth transfer, even into their 70s.

Modern families are dynamic. Hook-ups, break-ups, births, deaths, and divorce can have confusing consequences for your wealth plan. You’ll need to consider how your family’s composition might change in the future and how you can safeguard your vision for your wealth in the face of those changes.

Tax implication can vary widely depending on how your assets are held. Any restructures or transfer of assets need to be considered carefully so, independent tax advice and/or legal advice should be sought.

An important step towards preserving family wealth over several generations is putting a wealth transfer plan in place. A private banker can help you facilitate conversations with your family. Planning ahead can help your family avoid becoming a statistic in the three-generation curse.