Any fool can make a fortune. It takes a man of brains to hold onto it after it’s made.
– Cornelius “The Commodore” Vanderbilt
We’ve all heard the story of the Vanderbilt family. A US$5 billion (adjusted for inflation – 2017) balance sheet was depleted within 20 years. No Vanderbilt would be among the richest people in America after this time. In fact, when 120 of the Commodore’s descendants gathered at Vanderbilt University in 1973 for the first family reunion, there was not a millionaire among them.
From rice paddies to rice paddies within three generations.
– Japanese proverb
Statistics back up this folklore. Several studies have found that 70% of the time family assets are lost from one generation to the next, and all assets are gone 90% of the time by the third generation.
More often that not, families focus on those who have created with wealth. Seldom is the focus on the potential receivers of the wealth – this is where we need to focus if we want our legacy to continue. Investing your family’s assets and crafting a careful estate plan are critical in ensuring success, however, so too is the preparation of your heirs. A successful inheritance is just as much about parenting as it is about money management.
So what does it take to preserve the millions (or billions)? Here are five ways you can increase the chances of preserving the family fortune and not becoming just another statistic.
Money is not a dirty word
Money is not a popular topic over the family dinner table. Especially if parents are worried that it will spoil their kids. Young people who inherit such wealth, without any preparation, like lottery winners, can be completely derailed.
The uncertainty of whether they’ll outlast the family’s wealth, or the uncertainty of how to deal with the topic generally keeps parents silent. Yet, they’re forever discussing the topic between themselves, speculating a to what they children might or might not want. Whatever the reason for the lack of communication, heirs who are ill-prepared are left to wonder why their parents thought they were incapable of handling the information or couldn’t be trusted. It’s best to drop the ego, and get on with the conversation – discuss the wealth you have and your plans for it. Get your children involved. Find out what’s important to them and the things they’re passionate about. And don’t forget about how it came to be in the first place, especially if it was created several generations ago.
Embark on a mission
Most people know it subconsciously, yet so many people ignore it consciously. Life is about more than money, and that money is simply a means to an end. Make sure your legacy is about more than just money too. What are your family values? What is your family’s purpose? What is your life truly about? What is your legacy?
Involving the entire family in determining common objectives and deciding how they’ll be accomplished avoids the trap of your children being dictated to, and you dictating to your children. It gives you the opportunity to express your preferences to you children, as well as the opportunity for your children to express theirs to you. It may also ease tension between family members, especially between those running a business for example, and those not involved.
Discuss money at a young age
Even at an early age, children should be taught money skills – having one thing may mean not having another – from budgeting to instant gratification. A common concept is to give your children three piggy banks, one for savings, one for spending, and one for giving. Children need to learn the concept of priorities and decision making. If you haven’t seen The Marshallow Test, it’ a must watch. Standford University ran this experiment, which was performed on young children demonstrating the significance of delayed gratification.
Put on the training wheels
Avoid the mistake of concealing all the family’s wealth in the pursuit of protecting your children and preserving your wealth. You’re probably doing more long-term damage than good.
Help you children invest they’re money. Assist them in researching different investment options. Match their contributions to incentivise their saving. When it comes to giving, ask your children to decide who and what they would like to support. More importantly, ask them to explain why. The onus is on us as parents to educate our children, our schools certainly aren’t doing it.
Assemble a strong team
Over and above your financial adviser, tax adviser, and lawyer, you may want to bring in mentors and coaches for your children (it could also be the same people mentioned above). The advice of an independent person or an outside expert, over and above mum and dad’s opinion, can make a big difference. Although the advice may echo the advice on mum and dad, the impact it has on your children can be remarkably different.
The outside expertise can come in handy when your children are faced with money related decisions. Whether it’s your children’s friends asking them for money, or the never-ending European trips with friends, or that next hot tip investment – one of the surest ways to wither away an inheritance, an independent coach can act as a sounding board and guide.
In the end, you’ll have the best shot at preserving both your wealth, your legacy, and your family with a multi-generational effort that begins when your kids are born, not when you die. Unlike investing, where timing can be critical, there’s no bad time to invest in your family’s legacy.
What’s your plan to preserve your hard-earned wealth?