“The first generation builds it; the second generation maintains it; the third generation loses it.” This dismal proverb succinctly states the conventional wisdom around the accumulation and subsequent de-accumulation of significant wealth. Unfortunately, it has become a proverb because it is so often an accurate description of what happens to the financial legacies created by a founding generation: legacies that they hoped would provide for those who came after them, but which are so often wasted away by careless spending and poor financial judgments. One 20-year study of 3,000 wealthy families discovered that 70% of the families had lost their wealth by the second generation, and 90% had lost it by the third generation.
In our work with family stewards, we spend a tremendous amount of time educating about how family fortunes are built, preserved, and, too often, lost. While each situation is as unique as the individuals who make up the family organization, there are some basic principles for building and preserving a family financial legacy that can offer significant advantages if they are understood and put into consistent practice.
- Get good advice for preserving and increasing wealth. Though many fortunes are initially built by good, old-fashioned hard work and creativity, their chances of preservation are greatly enhanced by the help of qualified professionals. As wealth increases, aspects like taxation, estate planning and conservation, and investment management take on greater importance for the long-term preservation of value. Founders who get good advice on investing, minimizing taxes, and proper use of estate planning tools are much more likely to pass on significant legacies to those they care about.
- To build a legacy of wealth preservation, build a multigenerational culture of financial education. For many first-generation wealth builders, the concepts of saving, budgeting, and controlled spending are second-nature. But for their children, who may have grown up with an assumption of many of the privileges wealth confers, these principles are unlikely to be as intuitive. This is where a qualified, fiduciary wealth advisor can offer tremendous support as a financial educator. When children grow up in a culture of attention to the principles of sound financial management, they are much more likely to adopt these principles when they “come into their own.”
- Properly utilize trusts and other estate planning tools. This goes back to the importance of building your team of trusted and qualified advisors. Properly designed trusts and other estate planning concepts that are carefully designed to fit the specific needs of your family can provide both security for future generations and significant safeguards against the inexperience of heirs who may not be fully ready for the responsibilities of managing a financial legacy. Especially when combined with a solid program of financial education, a well-conceived trust can provide the “training wheels” for younger generations while also preserving and stewarding assets for future years.
Empyrion Wealth Management – a part of Mercer Advisors specializes in helping family stewards who want to create durable financial legacies. Whether your most important aims center on financial security for the next generation, building a philanthropic tradition, or some other goal, we can help you find the expertise you need to create a plan that is right for you. Find out more about our work with family stewards by reading our whitepaper.
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All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate, but is not guaranteed or warranted by Mercer Advisors. Content, research, tools, and stock or option symbols are for educational and illustrative purposes only. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors. Mercer Advisors is not a law firm and does not provide legal advice to clients. All estate planning document preparation and other legal advice are provided through Advanced Services Law Group, Inc.