Key Takeaways
● You’ve worked incredibly hard to build your assets. There’s a 90-percent chance it will all be gone within two generations.
● The vast majority of families treat money as a taboo subject—and that’s where the breakdowns begin.
● Have honest money conversations with your family and make sure you are in alignment about shared values.
● Becoming your family’s banker can work wonders for your wealth preservation and liquidity.
Regardless on whether we actively think about it or not, we are making an impact to those around us on a daily basis. The true nature or magnitude of that impact could take some time to reveal itself. However, for most things that matter and are difficult to achieve it requires continual discipline and actions to reach the outcomes you desire.
From your health, to relationships, to your wealth, putting in the effort consistently with intention will give you the greatest chance to reach your desired outcomes.
As it relates to your wealth, there’s a Japanese proverb: “From rice paddies to rice paddies in three generations.”
Countless books and movies have been written about remarkable individuals who rose out of poverty to achieve great wealth and fame. However, you rarely hear about what happens to that wealth after they pass on. Spoiler alert: It’s not pretty.
A study of more than 3,200 high-net worth families by The Williams Group wealth consultancy, found that seven out of ten wealthy families (70%) lose their fortune by the second generation and that number jumps to 90 percent by the third generation. Why?
Usually it has to do with one of three things according wealth advisor Michael Cole, author of the book More Than Money:
1. Poor communication and lack of trust among family members (60% of the time).
2. Lack of preparation about how to handle an inheritance (25% of the time).
3. Lack of a shared vision about family goals around money (10% of the time).
Contrary to popular opinion, wealth disintegration rarely has to do with bad investments, poor tax planning, or inadequate performance by a family’s legal and financial advisors. It’s often due to the simple fact that money is a taboo subject in many families. As reported in MarketWatch, Cole had a client worth $100 million who lived very modestly. His estate plan gave each of his three daughters equal one-third shares of his vast fortune. Unfortunately, he never discussed the plan with the young women. When he died, there was a “feeding frenzy” of people wanting to get his daughters’ time, attention and money and they were completely unprepared for the responsibility that came with their windfall. As you can imagine, they didn’t hold on to their millions for long.
During the late 19th century, the Vanderbilt’s were the wealthiest family in America. By 1973, when 120 members of the family gathered at Vanderbilt University for their first family reunion, none of them had even $1 million of the vast fortune left.
As we see so often, the people in the family who created the wealth—often by building a business from scratch—are relentless and obsessive. The children, grandchildren and subsequent generations who were raised wealthy are just not driven the same way. The tend to have a much more casual relationship with money and they’re certainly not as single-minded about keeping it, much less making more of it.
Wealth preservation tips for successful families
You don’t need an 8- or 9-figure net worth to benefit from these simple strategies below:
1. Have serious conversations to determine how to manage the family money.
2. Discuss the roles each family member should play in preserving the clan’s wealth and using it to support causes they believe in.
3. Craft a shared family mission statement about what the money means for their lives.
4. Consult with an estate attorney to address your desired outcomes and situations that could be unique (e.g. special needs child).
In their book Perpetual Wealth, Kim Butler and Kate Philips share a number of excellent strategies for avoiding the rice paddies to rice paddies trap. Here are my favorites:
1. Control wealth and liquidity.
2. Understand “family lending” as a means of providing capital.
3. Utilize the family’s human capital.
4. Develop a long-term view about money (i.e., “financial maturity”).
Let’s take them one at a time.
1. Control wealth and liquidity
Most prosperous families store their safe dollars at banks. Makes sense, right? Actually, doing so just makes more money for the bank and not the family. However, families that have learned how to save and store capital (and act as their own banker), sit in a very different position. Now their money becomes more productive – I hate lazy cash — and is better protected from creditors.
Further, it can be used whenever they need it for any purpose imaginable (e.g. private lending, investing, education, or starting business). Becoming your own banker does not require massive amounts of capital like a conventional bank. You just need the right kind of Whole Life policy. More on that in a minute.
2. Family Lending
Generations of America’s richest families have used Family Banking for years. Now you can, too. Warren Buffett says he gives his adult kids “enough money to do anything, but not enough to do nothing.” By that he means he wants his children to have the resources to pursue their greatest ambitions – and to help the world — but not so much money that they can afford to sit around and do nothing.
You don’t have to have Buffett’s billions, by the way, to do the same thing. By utilizing the family lending structure and processes, you can teach your children the fundamentals of disciplined borrowing, lending and patient investing. They’ll learn how to manage cash and debt and start making their own financial decisions which will guide them on their own financial journey.
For more about family lending, feel free to download my free guide to Family Banking.
3. Human capital
Our No.1 asset is our own human capital—our smarts, experience and know-how. The skills and knowledge we’ve developed over the years as parents can filter down to future generations. This can include the books you’ve read, the mentors you’ve learned from and the mindsets you’ve developed. You can give your children a head-start by introducing them to concepts they’ll never learn in school.
4. Long-term thinking about money (financial maturity)
Financial maturity comes with time and experience, but we can help guide our children to think long-term about money. One of the best ways to do this is by teaching them the value of long-term saving and investing, delayed gratification, and protecting our No.1. asset (ourselves), which includes our ability to work and earn money. This perspective also focuses on giving more of ourselves and providing service to others.
How can we impact the world around us and our families for future generations? That is a mindset that I’m sure young people do not consider early in their lives. As parents, we can introduce that through our discussions with them.
Conclusion
Holding on to your hard-earned wealth shouldn’t be as hard as building it, but it is for families that treat money as a taboo subject. Having honest conversations with your family and having a shared vision about what money means in your lives, will substantially increase your odds of keeping wealth in the family—and supporting causes you care about most—for generations to come.
If you or someone close to you has concerns about ensuring their wealth lasts for generations , please don’t hesitate to contact me to schedule a Discovery Session.
Also, come join our private Facebook group to connect with others looking to gain control over their finances https://www.facebook.com/groups/UnconventionalFinancialWisdom/
