By Dr. James M. Dahle, WCI Founder
Most people never save up enough money to retire comfortably. If people pay attention, run the numbers, save money, and invest well, they often punch out of the workforce right when they hit their number. That usually results in enough money to pay for their retirement and have enough left over for a small inheritance.
Then, there are a few people who through some combination of luck, frugality, and entrepreneurial skill end up with far more money than they will ever need. These people often find themselves supporting worthy charities. But many want to make life easier for their children and grandchildren. Sometimes they dream of helping their family get ahead for many generations to come.
Perpetuating Generational Wealth Is Hard
Unfortunately, it usually doesn't work, at least not for long. There are eight reasons why:
#1 You Had Too Many Kids
The first reason is entirely your fault. You had too many kids. Imagine for a minute that you die with $20 million. You leave $5 million to each of your four kids. They each had four kids. They're each left $1.25 million. Then, they each had four kids. The fourth generation is now left just over $300,000. Which is nice, but it is nothing like $20 million. It barely pays for a college education at some schools.
#2 Heirs Spend Too Much
Perhaps a bigger problem is that an heir left $5 million is unlikely to leave that $5 million behind. Heirs simply spend too much. Just to pass along an inheritance equal to what you received requires you to reinvest at least enough of the earnings to keep up with inflation. In reality, most heirs spend MORE than their inheritance earns, not less. People are people and most of them aren't savers.
#3 Estate Taxes
The federal government (and many state governments) tax money left behind above a certain exemption. While the current exemption is actually quite generous at $24.12 million for a married couple [as of 2022], amounts above that are taxed at very high rates. If you leave behind $100 million, about $30 million will go to the federal government. If you are a Washington state resident, you can kiss another $15 million or so goodbye. If by some miracle the estate is still large when the next generation dies, it'll get another massive haircut.
#4 No Hunger
Imagine how much wealth YOU would accumulate with even a relatively small head start. If I were given just $1 million dollars in my 20s, I could have doubled that six times by the time I died in my 80s! Or could I? It turns out that the more you have, especially if you didn't earn it, the less drive you have to earn more.
Stanley and Danko documented this effect in The Millionaire Next Door 25 years ago. Heirs who receive “economic outpatient care” don't actually get ahead; they get behind. They simply don't have the “hunger” that drove the first generation to build wealth. Beyond that hunger, they often don't have the intelligence or skills that allowed the first generation to build all that wealth. Even just trying to run the same business may not work out since the economy frequently changes, making older businesses obsolete.
#5 Divorces
Many well-to-do people put trusts in place and require pre-nuptial agreements that protect the family fortune from the ex-spouses of their children. But I'm sure a lot of them do not. Divorce is common and an easy way to cut an inheritance in half very quickly.
#6 Financial Catastrophes
The US is somewhat unique in that it has had a long run of prosperity without any really catastrophic financial events. Sure, we had the Great Depression, but it's been 90 years. We haven't had the hyperinflation that many other countries have experienced, nor have we had the devastation of Germany and Japan at the end of World War II. But if you look at the history of the world, it's pretty rare for any geographic area to go more than a century or two without one of these wealth-destroying events occurring.
#7 Failure to Inherit Money Management Skills
Great, you say. I won't leave my kids all that much money. I'll leave them a financial education instead. Then, they can make their own money. The government can't tax that, it can't be frittered away, and you can't lose it in a divorce. However, now we're playing the telephone game. Yes, you can probably do a pretty good job with your kids. And maybe between you and them, you can get to the third generation. But now you're relying on someone who was a teenager when you died to pass it on to the next generation. Something is likely getting lost in translation at each step, and within a few generations, POOF! It's all over.
#8 Family Fights
Jonathan Clements noted in 2020 that he is the great, great-grandson of an English tobacco baron. He received no inheritance. I don't think that's unusual at all. The Wall Street Journal says 90% of inheritances are gone by the third generation, but it says there's another big factor—family squabbles and lack of trust.
“Researchers at the Williams Group, a family-wealth consultancy based in San Clemente, California, surveyed more than 2,000 affluent clans over 20 years, searching for an explanation to the boom-and-bust syndrome among families. High taxes and poor investment advice were not the biggest factors; the study found that 60% of the time a trust and communication breakdown among family members played the biggest role. It's not hard to imagine squabbling siblings, mired in childhood resentments and rivalries, who can't agree on a schedule for the family beach house, much less how to manage Dad's business or which charities should benefit from the family's philanthropy. Helping to build trust among grown siblings or cousins, says Vic Preisser, managing director of the Williams Group, can be especially tough when they can only communicate about shallow things or aren't speaking to each other at all. ‘Wealth is a magnifier,' he says. ‘If you have problems, it will magnify them.'”
What Can You Do to Pass on Generational Wealth?
So, is it hopeless? I think it probably is. But that doesn't mean you can't make a big difference for a couple of generations, and maybe your family will be one of the rare few that pulls it off. Here are a few tips:
#1 Start the Financial Education Early and Keep It Going
If you're in this situation, start teaching your kids about money early on. Teach the dangers of debt, how to live below your means, how to budget and invest, plan an estate, and protect your assets. Teach them how to teach their kids. If you have advisors, enlist their assistance—before your death and after.
#2 Live Way Below Your Means
If you are making a ton of money and have a ton of money, there is no rule that says you have to live like it. You can live a middle-class (or more likely an upper middle-class) lifestyle. This will be much easier for your children to maintain from their own earnings +/- part of the earnings from their inheritance. But if they're flying to summer camp in a private jet, don't be surprised if they die penniless.
#3 Warren Buffett Philosophy
Warren Buffett famously said that he was going to leave his children enough money to do anything they want, but not enough to do nothing at all. There is a lot of wisdom there. We don't want our kids to struggle in the same way we might have (does every generation really have to donate plasma to eat in college?), but we also want them to work and earn their own fortune.
#4 Have Them Manage a Charitable Fund
It might be easier for them to manage money properly if the ability to spend it on themselves is taken away from them. Not only does your fortune last longer and do more good, but they might also learn from your example to build their own fortunes and perpetuate the family values. Serving together on a charitable board may also help preserve family relationships.
These guys will be working and earning their own fortunes.
#5 Spendthrift Trusts
You don't have to give them their whole inheritance the day you die. You can pass the money in trust, so they are theoretically older and wiser by the time they get the lion's share of it. Perhaps there are more requirements to receive their inheritance:
- Get a degree
- Work full-time
- Save up their own first million
- Reach a certain age
- Be married with children
There are all kinds of options you can put in there, but make sure you think them through carefully.
#6 Skip a Generation
Although you need to be aware of how the Generation-Skipping Tax works, any time you can skip a generation, you extend your fortune that much longer. An easy example is to open 529s for your grandkids. That money won't count on the FAFSA, and your children can't spend it before the grandchildren get to it.
If you are in the fortunate position to have more than you need, carefully consider how you might use that fortune to benefit future generations.
What do you think? How will you preserve your family fortune? How long do you think it will last? Did you inherit significant money? How did it affect you? Comment below!
I am a later career physician entrepreneur and I have been thinking about this deeply in recent months. Our current net worth is 24.7M and our CPA wants us to set up SLAT trusts (spousal limited access trusts) to preserve the 23M federal estate tax exemption in perpetuity, as the estate tax laws may likely be less generous with a new administration.
I hate complexity, large legal fees, and accounting fees that stretch on into the future. And I worry that giving too much money to our kids wouldn’t be healthy for them. One child is already a millionaire on her own as a young adult, through hard work and good financial habits. The other child is a work in progress, recently got a promotion to a highly compensated position, but spends too much and has credit card debt. I like the idea of requiring them to make it on their own before receiving any inheritance.
I am so averse to complexity that we are probably going to pass on these trusts. We will roll the dice and just pay the estate taxes, whatever they may be when we die. Statistically speaking, the second spouse to die will be in about 30 years, and a lot can happen in 30 years, with kids, and hopefully by then grandkids, and who knows what the federal and state tax laws will be that far off in the future.
Wow, congrats on your success Ziggy!
I’m not in your position as I just started my career and am working to build wealth. I also hate complexity but to me, the idea of letting taxes take that much of my money because I don’t want to be bothered doesn’t jive. Maybe create a charitable fund, better for your family to be able to have some control over the cause your money goes to. Maybe I’m leaving to your child w credit card debt you create a trust that won’t allow them to get the money until debt is gone…or money can only be used on debt until it is gone.
Lots of options and it’s awesome that you have these options because of your hard work!
The Prudent Plastic Surgeon
I think your best bet is to make plans based on current law, then change them when laws change rather than just throwing up your hands and declaring it all unknowable. Unless the US Government is your favorite charity/heir, then your approach is fine.
Ziggy: Yes, congratulations to you!
I’m concerned for you, and all readers who may have 7M or more in net worth.
As you know, the present 23.16M (2 x 11.58M) federal estate tax exemption for a couple will expire by itself on 12/31/25, or it can be changed sooner. If Biden wins, per Forbes, “Biden would dramatically alter the current estate tax by taxing any unrealized appreciation in the decedent’s assets at the time of death. This would accelerate collection of the tax when compared to simply eliminating the step-up, as the IRS won’t have to wait for the heirs to sell the assets to tax the gain. We don’t know much about Biden’s plans for the estate tax exemption, but given his stated desire to rollback the TCJA’s benefits on the rich, a return to the pre-reform exemption amount of $3.5 million is likely.” https://www.forbes.com/sites/anthonynitti/2020/03/06/tale-of-the-tape-comparing-the-tax-plans-of-joe-biden-and-bernie-sanders/#616fb2114443 And yes, Biden has said he intends to eliminate the step-up in basis.
If Trump wins, due to the need for revenue, to pay for the COVID stimuli and to replace lost revenue from the weakened economy producing less-than-expected taxes, there is the possibility the federal estate tax exemption gets trimmed, but probably not all the way down to 7M (2 x $3.5M).
This is why there are numerous articles encouraging people to do estate planning now. For instance:
“Use It Or Lose It: Locking In The $11.58 Million Unified Credit”
https://www.forbes.com/sites/matthewerskine/2020/07/17/use-it-or-lose-it-locking-in-the-1158-million-unified-credit/#204ea36779e4
Also,
“The Perfect Storm for Estate Planning Before Year End”
https://www.jdsupra.com/legalnews/the-perfect-storm-for-estate-planning-91436/
Of course, Estate Planning is more than “just” avoiding estate taxes. Here are some purposes I wrote out when I was doing my plan, not in a particular order of priorities:
Avoid estate taxes
Avoid probate
Avoid the generation skipping tax
Avoid capital gains — obtain all available steps up in basis
Asset protection
Move assets forward in favor of family, future descendants, and charities
Take advantage of current exemption limits before they sunset or are removed by new legislation
You mentioned a bunch of hassles, to wit: I hate complexity, large legal fees, and accounting fees that stretch on into the future. And I worry that giving too much money to our kids wouldn’t be healthy for them.
I concur to all that, and more. Estate planning can be a PITA. I went through 10 drafts of my trust, but I have a JD so that was to be expected. To get the document to do everything desired can be like getting the planets to align: it is a balancing act to ensure assets are out of your taxable estate, yet within some user-defined (or user comfortable) level of control.
That said, was it worth it? It was to me. I used an IDGT with other techniques to shield 38M from estate tax, along with the other benefits I mentioned.
Will the hassles be worth it for you? I truly believe so. You worked hard for your money. If you fail to plan, Uncle Sam has a plan for you, and you might not like it.
“I am so averse to complexity that we are probably going to pass on these trusts. We will roll the dice and just pay the estate taxes, whatever they may be when we die.” I hope you don’t go this route. An estate tax attorney can help with a lot of the complexities.
WCI already addressed spendthrift issues. You can set up trust(s) with lots of controls or triggers, as needed.
Thanks for reading! I hope that it helps you, and all readers who may have 7M or more in net worth.
BTW, my wife is the Doc. I’m a real estate investor.
# 1, let’s remember that the president does not set tax policy by herself. Nor does the president control the economy etc.
# 2, if tax law changes such that the exemption gets much smaller, it isn’t like there will be no warning about it. They’ll be fighting about it in Congress for months. And even if there is no warning, the likelihood of you dying the week the tax law changes and when you can get in and see your attorney to modify your plans seems pretty low. No reason to panic about it now. Chances are you will have time to implement a SLAT if you want as per your linked article.
But hey, if you’ve got $7-24M+ sitting around, why not spend a little time with the estate planning attorney. It’s likely to be a great use of your time and money for better reasons than just avoiding estate taxes.
I spoke with another advisor today. I am strongly leaning towards holding off on the SLAT trusts. If I predecease my spouse, I don’t want her to have to deal with a lot of complexity. By keeping things simple, that helps her. There is no estate tax owed for the first spouse to die.
This decision may compromise the total amount that the kids get, but giving the kids too much is not a goal of ours. There will be plenty of money to help with tuition for the grandkids, if we should be so lucky to have some in the future. It might be nice to give some extra money to charity as opposed to the government, but if that choice involves burdening my spouse with complexity that she has no interest in understanding or managing, then keeping it simple is the best way to take good care of her, and that is my first goal.
We gave the kids a good education and the ability to make their way in this world as successful adults. A modest inheritance might be nice, but too much is not good in our view. Let’s say theoretically the estate is worth 50M when the second spouse dies. And let’s say the government takes 60%. 20M left to divide for the kids and the grandkids is way more than enough, assuming we have not given it all away to charity before then.
Ziggy: Thanks a bunch for writing. It gives me some “closure” knowing you saw my post!
There is a ton of wisdom in what you said. In the end (no pun intended!), this is a very personal decision, with lots of dimensions. The key is you are thinking it through, which makes it an informed decision. Your informed decision.
If it turns out you do decide to do a SLAT or DAPT or IDGT, the sooner is better. Estate tax attorneys are busy with other folks doing plans to protect their federal estate tax exemption, and everyone is different in how quickly they have specific answers to questions like: who will be the guardian(s) / trustee(s) / trust protector(s) / appointer(s) / etc? And who will be the successive persons to all those positions?
“We gave the kids a good education and the ability to make their way in this world as successful adults.”
Hard to find a better definition of success, IMHO.
Best regards to you, to Dr. Dahle, and to all readers!
60% is way too high. More likely you lose 40% of 60%, or about a quarter of it, leaving something like $38K behind.
Is this accurate? Since when do 529s not count on the FAFSA?
“An easy example is to open 529s for your grandkids. Not only does that money not count on the FAFSA, but your children can’t spend it before the grandchildren get to it.”
If owned by grandparent, only distributions show up. For example https://www.manning-napier.com/insights/blogs/financial-planning/3-ways-to-effectively-use-grandparent-owned-529-plans
Thanks for the clarification. I should have phrased it the way you did.
“…within a few generations, you end up with a few Kardashians and POOF! It’s all over.”
hahahahahaha. Best line of the year. Well done.
Another great and informative article.
Perhaps the content and reason for fame is questionable, but the close family bond is enviable and what parent wouldn’t want a child who had started their own business (Kim – skims, Kylie – cosmetics), pursued a dream (Kendall – modeling), created work life balance with their kids (kourtney) and weathered hard circumstances (rob).
Seems more accurate to say and “poof” wealth has quadrupled or more
I’ll defer to you as your knowledge of the Kardashians far exceeds mine. Who would you suggest I replace “Kardashians” with in the blog post that would make my point better?
The Hilton sisters. They’re actually “the grandkids” too so closer to the underlying point you’re making. I don’t care what any other poster says, they haven’t contributed anything to society so they’re not a sexist example. That said, from a pop culture perspective the reference is about 20 years too late so your point may have been lost anyhow.
Don Jr and Eric.
Too politically hot.
an example of when the whole tribe gets it wrong. ………$200k for the high school graduates
https://www.youtube.com/watch?v=nz8V1kQtgts
Crazy stuff. Not sure I was much smarter at 18 though. Amazing the legislative body would not at least put a delay on getting all of the money at once when the interviewer could only find a single person planning to put the money toward a “good” cause.
I’m no huge fan of the Kardashians, but those women have built an enormous amount of wealth. Kylie Jenner was named by Forbes as the youngest self-made billionaire of all time in 2019. You can argue about their societal contributions, but there is no denying their skill at building wealth. That swipe at them reads a bit sexist.
https://www.forbes.com/sites/natalierobehmed/2019/03/05/at-21-kylie-jenner-becomes-the-youngest-self-made-billionaire-ever/#2d09deeb2794
Last I checked the Kardashians are not all women.
Kardashian family tree
Arthur Kardashian, m. Helen Arakelian
Robert Kardashian, m. Kris Houghton
Kourtney Kardashian, formerly partnered with Scott Disick
Mason Dash Disick (b. December 14, 2009)
Penelope Scotland Disick (b. July 8, 2012)
Reign Aston Disick (b. December 14, 2014)
Kim Kardashian, m. Kanye West
North West (b. June 15, 2013)
Saint West (b. December 5, 2015)
Chicago West (b. January 15, 2018)
Psalm West (b. May 10, 2019)
Khloé Kardashian, formerly partnered with Tristan Thompson
True Thompson (b. April 12, 2018)
Rob Kardashian, formerly partnered with Blac Chyna
Dream Renée Kardashian (b. November 10, 2016)
Barbara Kardashian Freeman
Thomas “Tom” Kardashian
So I think an accusation of sexism is inappropriate.
Second, until 10 minutes, I really didn’t know anything about the Kardashians. I used them as an example of people blowing a fortune. Which, now that I have read a wiki article about the Kardashians, is totally inaccurate. Thanks for taking all the fun out of blogging. And I can never get that 10 minutes back.
I took all the fun out of blogging? I thought you had a thicker skin than that. It WAS a sexist example.
And I think you know that when you say “the Kardashians” most people think of the women in the family who are the most famous. You may have meant Reign Aston Disick when you said “Kardashian,” but I doubt it.
By the way, I am a huge WCI fan and have recommended the site to anyone who would listen. I am not your enemy.
# 1 I obviously knew very little about the Kardashians when I wrote this post, as mentioned above. You might know that the women in the family are more successful than the men, but I didn’t even know any of them were successful. I’ve never even seen the show. So I really had no idea what most people think of when I say “Kardashian.” I just thought they were wealthy heirs/heiresses who spent like crazy.
# 2 Using a woman as an example is not automatically sexist. Don’t be ridiculous. Talking about thin-skinned.
# 3 Going through an entire blog post and leaving a ridiculous anonymous comment about something that has almost nothing to do with the point of the post and inappropriately calling the author a sexist says a lot more about the commenter than the author.
# 4 Nobody actually likes to be called a sexist, racist etc. I doubt there is a single incidence in the history of mankind when doing so resulted in behavioral or attitude change. And yes, it takes the fun out of blogging to have interactions like these instead of discussions about the points the blogger is trying to convey. What a fun thing to spend hours writing a post and wake up to that as the primary reaction to it! Really makes you want to write another one.
I’m sorry. I didn’t mean to offend you. Holly clearly made my point much more gracefully. I said the comment read a bit sexist (which I still believe) but I don’t think you are sexist based on my reading of your blog for many years. I’ve seen you try really hard to be inclusive and change things when they get called out which is the only reason I commented. It was such a trivial throwaway part of the post and I never thought I’d find myself in the position of defending the Kardashian family, but the truth is women are often underestimated.
It did hurt to hear one of my favorite bloggers say I took all the fun out of blogging and I wasted his time when I expected something more along the lines of your reply to Holly but I also realize you are doing just fine and don’t need my advice. I really wish you no ill will and I’m sorry this has taken up whatever time/energy it already has.
I think your blog, podcast, and course are invaluable and have really motivated me to become financially literate, and I thank you for that.
I appreciate your kind words. And no, I won’t be quitting blogging any time soon! But I do understand why some very good bloggers (Mike Piper for instance) just turn off the comments.
@mishmish, Throwing out ad hominins like “sexist” “racist” is lazy, banal substitute for an actual argument. In today’s lexicon it means “you hurt my feelings” “I disagree and am too lazy to think.”
@JZ: I think you meant ad hominem, literally meaning “too the man (person)”. “Ad hominins” doesn’t exist in today’s lexicon. Throwing out misspelled (and misunderstood) words is a lazy substitute for an actual counterargument.
Mishmish’s comment did not say that Jim (the man) was a sexist. The comment was, “That swipe at them [the Kardashians] reads a bit sexist,” clearly referring to the author’s argument, not the author.
I happen to agree that the original post was not sexist. It is more likely a poor attempt at a joke based on a subject outside of Jim’s vast sphere of knowledge. It also was not racist, which curiously is an accusation only raised by the author in an attempt to combat a perceived accusation of sexism.
It turns out I’m not very funny. It’s a recurring problem.
Just an FYI, maybe not the best to argue for someone who lies about their wealth (although still wealthier than most of us).
https://www.forbes.com/sites/chasewithorn/2020/05/29/inside-kylie-jennerss-web-of-lies-and-why-shes-no-longer-a-billionaire/#623e301e25f7
I want to just first say we appreciate the White Coat Investor allowing comments on these articles to encourage additional perspectives and insights for increased learning, despite there also being some downsides to allowing comments (some distracting and unhelpful comments). I want to add just a few insights I’ve learned from estate planning.
Regarding #3, numerous great strategies exist for minimizing or eliminating estate taxes, but then the human considerations come into play and make these decisions harder. One of the best ways to avoid estate taxes and pass on more wealth is simply to start planning early (ideally at least 15 years or more before people find themselves between a rock and a hard place (such as retirement becoming very tempting or serious health issues are likely to arise). Anyone with dependents (typically minor children) or significant property (a net worth of $3 million or more) among other reasons should meet with a good estate planner and then adjust the plan as circumstances change.
Trusts can also help with #7 and #8, as #13 (the 2nd #5), discusses. They are excellent tools for passing down wealth because rules can be written into the trust document to govern how and when money is used. I often hear trusts referred to by the type(s) of features built into them (such as living trust, irrevocable trust, special needs trust, etc.). However, features are just that, and trusts can have various combinations of these features. The kinds of trusts that have specific requirements to avoid mismanagement or incentivize trust beneficiaries in particular ways take careful planning, but can often be much better vehicles for passing on inheritances, especially to grandchildren, than outright gifts or even plain vanilla revocable trusts (this is what most people get during their basic planning). With grandkids, a person can’t usually foresee how well the grandchild will be able manage money, and so having at least basic safeguards in place should nearly always be drafted in. Depending on various factors, additional safeguards are added. Then, grantors (the person(s) giving the wealth to fund the trust) can prevent much of the waste that so often accompanies inherited money. Having professional trustees as safeguards can be more costly, but for large estates they can be well worth it to avoid mismanagement and cut down on family fights.
Regarding #12 (the 2nd #4), I haven’t thought of managing private foundations from this angle, but it’s a great suggestion. A private foundation is not an active charity so there’s often less to do, but that’s a smart way to teach an adult child money management skills and get a tax break at the same time.
Regarding #14 (the 2nd #6), separating the estate tax exemption from the GST (Generation-Skipping Tax) exemption should only be done very carefully and deliberately (know your attorney routinely does this kind of estate planning- many who would prepare a Will or trust for clients wouldn’t know enough to do complex estate tax planning), but sometimes it could be a very worthwhile strategy.
The kardashians is a bad example, they have made a lot of money off of there show and branding deals.
Addressed already in comments above.