By Dominique Olivier
March 25th, 2024
The infamous “shirtsleeves curse” is one that has occupied the mind of many a wealthy patriarch on a sleepless night. Affecting 90% of the wealthy, even America’s richest family couldn’t escape its clutches.
“From shirtsleeves to shirtsleeves” is an adage that usually pops up when the topic of generational wealth is under discussion. The idea behind this saying is that the first generation of wealth builders in a family will start their journey in shirtsleeves (i.e. not having enough money to afford a coat). Through the hard work of the first generation, the second generation will grow up under better circumstances. Their children, the third generation, will be born into wealth and will eventually squander it, landing themselves and their descendants back in shirtsleeves.
It sounds like a cruel joke or perhaps a myth cooked up by wealth managers, yet the statistics support this theory. 70% of wealthy families are likely to lose their wealth by the second generation. By the third generation, that number can jump to 90%.
A recent survey by US Trust targeted high-net-worth individuals possessing over $3 million in investable assets. Its aim was to explore their strategies for preparing the next generation to manage substantial wealth. 78% expressed concerns about the financial readiness of their heirs to handle inheritance. Even more striking, 64% confessed to divulging minimal to no information about their wealth to their children.
The reason behind wanting to hide your wealth from your children seems obvious: parents are probably worried that children who know that they have a juicy inheritance coming to them will grow up to be lazy and entitled. But then what happens when parents pass away and children receive a vast inheritance that they were never adequately prepared for?
Conversely, talking to children about money from an early age – including how to grow it, donate it and spend it wisely – puts them in a far better position to be able to handle a large inheritance when the time comes.
The reason why a family fortune might survive in the second generation is often because that generation is involved in the family business from a young age. They therefore work side-by-side with the founders, witnessing their passion and drive, as well as familiarising themselves with the intricate details of the business and its industry. This explains why Billy Vanderbilt was able to double the family fortune after his father’s death.
Perhaps the greatest gift that you could leave your children – worth far more than their actual inheritance – is a roadmap and a plan to preserve it.
Educate them on the wonders of compound interest and guide them in understanding when their spending will start to affect the overall capital. Most importantly, make sure that your children are prepared to do the same for their own heirs somewhere down the line. You may also want to enjoy some of the money yourself. The stats tell us that even if you don’t spend it, your kids’ kids probably will.
