For your entire life, you have worked very hard to build up your estate for your children. You live a comfortable life. You buy them anything they want. You take nice vacations. But you also put aside plenty of money to ensure that they can sustain this lifestyle. You never want them to have to worry about money. The same goes for your grandchildren and their children.
That’s a grand plan. Unfortunately, it is not likely to work. Studies have found that most wealthy families (70 percent) see their riches disappear by the time they get to the second generation.
Even if your children buck the trend and keep the wealth in the family, their kids probably will not. The same study found that 90 percent of these “rich” families lost their wealth by the third generation.
A stunning revelation
You can work with your children to teach them about money management. You can talk to them about your goals. You can try to instill your values in them at every turn. It may work. After all, 10 percent of rich families do pass their wealth all the way down to the grandchildren.
But it probably will not work. This is a stunning revelation to many parents. They never dreamed that the kids could squander all of that money so fast. But they can, and they do. Consistently.
Why does it happen?
The reasons are different in every case. Sometimes, the money came in through a family business. Even if you knew how to run the company so well that it felt like a constant cash flow, your kids may not be good at it. They could lose a lot as the company dries up and fails over the next decades.
In other cases, kids run into expensive problems and simply spend money unchecked. One child has a problem with alcohol and drugs. Another has a problem with gambling. Yet another just gives money to friends and does not seem to realize that it can ever run out. It slowly wastes away.
In still other cases, it’s just bad luck. If the economy crashes, will the kids lose everything? If they get business advice or investment advice that doesn’t pan out, how much will they blow just trying to do the right thing? Financial gains are fairly fragile. Just because you had success does not mean it will continue.
A solid estate plan
You can get around some of these issues with a solid estate plan. For instance, you can use trusts to limit how much money the children get, when they get it and how they use it. If you do not want them to waste what you earned, make sure you know all of your legal options.