WHY MOST FAMILIES LOSE THEIR WEALTH BY THE THIRD GENERATION
by Tim Voorhees
The availability of money tends to undermine the pursuit of higher purpose. Andrew Carnegie, the 19th-century steel magnate stated, “The parent who leaves his son enormous wealth generally deadens the talents and energies of the son, and tempts him to lead a less worthy life.”
When heirs receive money without prior coaching on the purpose of money, they will seldom take the time to understand the values that helped accumulate the value of the inheritance. Inheritors do not understand the blood, sweat and tears invested in accumulating the wealth. Nor do heirs with money have much motivation to develop the bias toward diligence, delayed gratification, thrift, and other values needed to maintain healthy relationships with people who contribute to wealth accumulation.
There is frequently a lack of personally and socially beneficial purposes guiding the use of inherited wealth. Jesse O’Neil, author of The Golden Ghetto: The Psychology of Affluence, documents how money transferred to heirs without a meaningful purpose often fosters “Affluenza.” Heirs may lack the purposeful pursuits needed to cultivate self-esteem, self-worth, motivation, self-confidence, and personal identity. Moreover, the vacuum created by the lack of a healthy purpose leads to negative character qualities, such as the inability to delay gratification, unwillingness to tolerate frustration, feelings of failure, and a false sense of entitlement. As problems grow worse, heirs withdraw from others, avoid accountability, and develop progressively more serious social disorders. The presence of money catalyzes personality disorders. These disorders limit the ability to form vital relationships with other people and leave victims unable to find a comforting sense of purpose.
Around the world and across the centuries, heirs have lost wealth in a few short generations. In America, we say, “Shirt sleeves to shirt sleeves in three generations.” In Asia, families speak of going from rice patty to rice patty in three generations. Europeans talk of the entrepreneur achieving enough success that he no longer needs to wear clogs but then watching grandchildren squander wealth, resulting in the family going from “Clogs to clogs in three generations.” Likewise, in Italy, families have been known to go “from barn stall to barn stall in three generations.”
Frequently, the loss of wealth takes not three generations, but just three years. Zeeb and Cochell, in Beating the Midas Curse, tell of a family that squandered wealth accumulated over five decades in a mere twenty-four months.
Studies in America provide contemporary evidence that families still lose their wealth following the time-tested pattern. 60% of families waste away their wealth by the end of the second generation. By the end of the third generation, 90% of families have little or nothing left of money received from grandparents. Ultimately, 95% of all traditional inheritance plans fail.
Statistics collected from family businesses provide similar sobering facts. Only 30% of businesses make it to generation two and a mere 3% still generate profits in generation three. Given the dismal success of family enterprises, it is no wonder that 65% of family wealth is lost by the 2nd generation and 90% by the third generation. By the third generation, more than 90% of estate value is lost and, even worse, the generation three can usually articulate very little about the values that accumulated the wealth. Even in Australia, where there has been no estate tax, families lose their financial wealth and the values that accumulated the wealth by the third generation.