By Dr. Jim Dahle, WCI FounderI attended a couple of conferences a while back where there seemed to be a large focus on leaving “generational wealth” behind to heirs. While there was no formal definition of what generational wealth actually is, it seemed to be common knowledge and a common assumption among conference speakers and attendees that this was a good thing, a good goal. Many talks were about how to prepare heirs to deal with that sort of wealth right from the beginning of their adult lives. One speaker talked about how useful it was to read business books written by billionaires, presumably so you could be a billionaire, too.
I sat there for a while thinking about it. Then, I realized a couple of things.
First, I don’t actually want to be a billionaire—at least not in terms of today’s money and barring a crazy level of inflation. I don’t want to do what it takes to become a billionaire (and yes, I am aware of what it takes), and I have learned that beyond a certain point, more money = more problems. Yes, money solves problems, but it also creates them. If you’ve never had a problem created by your money, I hope you can have enough money to experience that someday. (I also wish people the opportunity to travel enough so that they know what too much travel feels like and to have enough time off so that they know what too much time off feels like.)
Second, this conference speaker has no concept whatsoever of “enough.” The concept of enough is perhaps best explained by Joseph Heller. Authors Kurt Vonnegut and Joseph Heller were at a party given by a hedge fund manager on a fancy island in New York. Vonnegut pointed out that the host had made more money in a single day than Heller had made with all of the sales of his popular book Catch-22 in his entire lifetime. Heller responded, “Yes, but I have something he will never have—ENOUGH!” I’m pretty sure that speaker had never heard this story, or if he had, he thought, “That’s nuts, why would someone not want more?”
An Optimal Amount of Wealth
I once listened to a conversation between a couple of friends (an attorney and a businessman) who were discussing the optimal amount of income. This was enough income that you could buy whatever you wanted, but not so much that your tax rate became “too high” or that people were trying to get you to give them your money or that you had to work too much to get it or whatever. It’s been a few years since this discussion, but they eventually settled on an amount in the $300,000 per year range.
Lately, I’ve been wondering if perhaps there is an optimal amount of wealth, too. This would be enough wealth that you never had to worry about money and could buy whatever you wanted, but perhaps not enough to have to worry about estate taxes or ruining your kids or kidnappings or not having enough friends in the same socioeconomic class or any of the other problems that come with having more wealth. I have no idea what that amount might be and it might be different for different people, but perhaps $10 million might be a good place to start the discussion.
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How Much to Leave Kids
I’ve written before that there are three questions to wrestle with when it comes to inheritances.
- How much to leave your kids (presumably vs. spending it yourself or giving it away)?
- When should they receive it?
- What conditions must be fulfilled for them to receive it?
Clearly, dumping millions onto an unprepared 18-year-old is a terrible idea, but that’s about where the agreement ends. Most people leave it all to their heirs, although that doesn’t necessarily mean life-changing money for the heirs because most people just don’t have that much—especially when divided between multiple kids. In fact, one reason people often leave nothing until their death is that they’re not yet sure if they’ll need it all themselves! Other people plan to leave nothing to the kids, giving it all to charity. Naturally, there are also plenty in the middle, who will leave some to charity and some to the kids. So, not everyone aspires to generational wealth. Estate planning is extremely individual.
Why It Is So Hard to Create Generational Wealth
The statistics are damning. You might’ve heard the phrase, “Shirt sleeves to shirt sleeves in three generations,” and the statistics back this up. When a wealth creator (Generation 1) creates wealth, 70% of it is gone by the time Generation 2 is gone. Ninety percent of it is gone by the time Generation 3 passes away. The Vanderbilts are the classic example. Cornelius Vanderbilt was the Warren Buffett/Bill Gates/Jeff Bezos/Elon Musk of his day. Six generations later, we have what? Anderson Cooper? With a net worth of something like $50 million, almost all of which he earned himself? And he’s probably doing better than anyone else in his generation of that family.
He reportedly inherited only $1.5 million (all his mother, a member of Generation 5, had left) of a fortune estimated to be worth $200 billion in today’s dollars. The fortune is, for all intents and purposes, gone. I’ve written before about why this occurs. The reasons include:
- Division among multiple kids in each generation (the great British aristocrats and nobility avoided this by leaving it all to the eldest son)
- Excessive spending/lifestyle by heirs
- Estate taxes
- Lack of drive among heirs
- Lack of training among heirs
- Financial catastrophes
- Family fights
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Should You Even Try?
If almost no fortunes last even 100 years, should you even bother trying to make your money somehow last that long? Even if the heirs are extremely careful in maintaining and growing the fortune, they, at a minimum, have to make up for a 40% estate tax haircut every 20-30 years. Their best bet is probably to take a page from the British aristocrats and leave the majority to just one of the kids.
But that just doesn’t seem right to our American ethos. What are the odds that every generation is going to feel that way? You can also leave the money in trust for just as long as your state will allow. That can be a very long time, but it does require you to “rule from the grave” by outlining exactly how that trust is going to work over the years. That doesn’t seem like quite the same thing as “generational wealth,” where a family stays wealthy for many generations in a row. Maybe instead of trying to establish generational wealth, it’s better to just leave them enough to “lighten their burden but not remove their struggle.”
I don’t have the answer, but every time I hear people talk about generational wealth, I certainly have the question!
What do you think? Is generational wealth a good goal? What does it mean to you? Do you think there is an ideal income or net worth? What is it? How much will you leave your kids, when, how, and why?
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