The famous American publication The Wall Street Journal published an article earlier this year detailing the results of a study, and discussions with several financial advisors, about inheritance and how Americans are handling (and have handled) them. I expect the situation is not far different in Canada, at least in principle.
The Boston College Centre for Retirement Research has stated that two-thirds of baby boomers will inherit family money, mostly in their later middle age, totaling $7.6 trillion (plus whatever money they may receive while their parents are alive). American household wealth, at the end of 2012, was estimated to be $64.8 trillion.
These amounts are staggering, to be sure. The United States (and Canada) is in the midst of perhaps its largest-ever intergenerational wealth transfers. So the question under investigation is what gets done with the money, once inherited.
The investigation seems to have concluded that the phrase “shirtsleeves to shirtsleeves in three generations” applies. There is no shortage of horror stories, with several cases of large amounts of money being spent quickly, such that someone asks one day, “Where did it all go?” (after it’s too late, of course).
Some of the people
The late Charles Rogerson was a New England banker who built the Boston Safe Deposit and Trust. His brother prepared several (tax-protected) trusts to prevent the family fortune from being wasted. Nevertheless, Charles’ son was able to exhaust the fortune through his hobbies and the collapse of his large real estate project in the 1980s.
Charles’ grandson, Tom Rogerson, is now a wealth strategist, travelling the U.S. in an effort to teach prospective clients about how to retain their family fortune.
Other brief histories of family fortunes wasted
1. The Vanderbilts. Their fortune came from railroads and shipping, and totaled about $100 billion. The heirs apparently went “hog wild,” and in a 1973 family reunion of about 120 people, there was not a single millionaire.
2. Mr. Huntington Hartford II. His family fortune originated with the famous A&P store chain. He went through hundreds of millions and died at 97, having lost tremendous amounts through “investments” such as a Manhattan art museum, a California artists’ colony and a Bahamian resort development (the latter included gold-plated bathroom fixtures and a medieval cloister).
3. Barbara Woolworth Hutton. Her fortune came from the legendary “five and dime” stores. She apparently went through about $1 billion on such items as art and jewellery, not to mention seven husbands. She died with a net worth of $3,500.
What went (and what goes) wrong
It appears some things don’t change from generation to generation. The Boston College study shows that family money rarely survives long. By the second generation, 70% is typically gone. After the third, 90% is gone.
The first problem seems to be that money spreads thinly over a fast-growing family tree (or trees). And many of those on the tree(s) are inexperienced at handling large amounts of money. The study speaks of “sudden wealth syndrome” that lottery winners, athletes and others experience.
The other problem is that inheritors feel they can go on permanent vacations, without having to create new income streams. The advisors suggest that inheritors don’t understand well enough that future financial success will depend on them, not someone else!
The other problem
Today’s economy and investment climate are perhaps more challenging than ever. The amount of debt in the world makes all countries’ economies volatile and uncertain. Investing is harder, such that inheritors face serious concerns in trying to retain and even grow their family fortune, or their own inheritances.
In my view, many of the boomers who inherit will have to use the funds for their own retirements, aside from thinking about the future generations’ inheritance.
Perpetuating the wealth/inheritance for future generations
Where do we go with all this? Well, regardless of the amount of the inheritance, the task for inheritors is to invest the funds and, at minimum, increase the family’s or inheritor’s income.
If the inheritor is still employed or running a business, stay with it if it’s possible and sensible to do so. Grow the inheritance rather than stopping work, so that the next generation will have a better inheritance.
Another point the article makes is that the next generation should be taught at an early age about managing and investing money. Involving children in investment decisions is crucial for their future skills and values regarding money (and other assets that can be inherited).
Another way to look at this issue is what some advisors call “the business of the family” – which involves finding ways to lower the probability of family fights down the road.
In my opinion, any person inheriting now or in the future should try to prepare for it in some way, depending of course on their circumstances. In a sense, an inheritance is a blessing and a curse. I find it unsurprising, given human nature, that there are fortunes blown and stories of extravagance. Both are to be expected with significant inheritances.
The challenge is to learn how to manage assets. That is why financial and other advisors can be critical. For example, here in the Lower Mainland, an inheritance coming from a house and some money in the bank may not have been significant 30 years ago. Today, however, such an Estate can easily be worth more than $1 million.
If there are only two or even fewer inheritors, that inheritance is worth managing. Properly planned, such an inheritance can finance the inheritor’s future.
This column appeared in the Richmond News on July 26, 2013.