The American dream of generational wealth contains a subtle irony. Families spend decades, sometimes lifetimes, creating something significant, such as a business, a portfolio, or a legacy, only to see it fall apart in a generation or two due to a confluence of poor choices, family strife, and tax bills that show up like unexpected guests at a funeral. Roughly 70% of wealthy families lose their wealth by the second generation, and 90% by the third. These statistics are harsh and well-documented. Anybody sitting on a sizable estate should be unnerved by this kind of statistic, but most families never anticipate it.
Every estate planner is familiar with the cautionary tale of the Vanderbilts. One of the biggest American fortunes of the 19th century—steamships, railroads, the kind of wealth that transforms a nation—was created by Cornelius Vanderbilt, but it had mostly vanished in three generations. The work that no economic crash ever had to do was done by unrestrained spending, a total lack of financial planning, and a failure to invest in assets that generate income. No one in polite company likes to acknowledge how frequently this story comes up.
On the surface, it appears that financial sophistication is what separates wealth-preserving families from those that do not. And it is, in part. Dynasty trusts, spousal lifetime access trusts, and grantor retained annuity trusts are all extremely potent tools used by America’s wealthiest families. Consider the Rockefellers, who created two significant family trusts in 1934 and 1952, diversified heavily into investments and real estate, and ultimately developed a whole institutional framework known as Rockefeller Financial Services to oversee what had grown to be an incredibly intricate portfolio. The family’s wealth is still estimated to be around $8.4 billion six generations later. That is not an accident. It occurs on purpose and through discipline that, to be honest, most families find difficult to uphold.
One tactic that often catches people off guard is “buy, borrow, die.” Rich families amass valuable assets, such as stocks, real estate, and artwork, and instead of selling them, they borrow against them. The money received from the loan is not taxable. There were no capital gains. Heirs inherit on a stepped-up cost basis upon death, which could eliminate decades’ worth of embedded gains. It’s elegantly simple, completely legal, and nearly purposefully undetectable to onlookers.
Threats like divorce and family strife are not given nearly enough consideration in these discussions. When family dynamics become hostile, even the best-laid plans can fall apart. When set up correctly, discretionary family trusts provide an additional layer of defense against this, protecting assets from court cases and divorce settlements in ways that simple inheritance just cannot. The Hearst family had an innate understanding of this. William Randolph Hearst did not give his children his fortune when he passed away in 1951. To supervise everything, he appointed a board of thirteen trustees. At the time, this choice most likely seemed strange. Now it appears to be pretty smart.
The threat that moves the slowest and has the greatest impact is inflation. Purchasing power gradually declines over decades for families that handle inherited wealth like a savings account, something to draw from steadily without a growth strategy. By spending about 4 to 5 percent of their wealth each year and letting the remainder compound, the families who avoid this approach their wealth more like an endowment. When you’re sitting on real money, it takes a discipline that seems almost counterintuitive.
The human element is possibly the most undervalued. Fortunes cannot be saved by financial instruments alone. Multigenerational discussions are common in families that endure generational shifts; these discussions cover not only where money is spent but also its purpose and associated responsibilities. The most costly error made by wealthy families might not be a poor investment. It’s the discussion they never had.
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