How To Stay Rich For Three Generations
Robert Frank | Wednesday, 16 Jul 2014 | 10:34 AM ETCNBC.com
The saying "shirtsleeves to shirtsleeves in three generations" remains as true today as it was a century ago. Kids, taxes, bad investing and the debauching effects of wealth over the generations have not changed.
An observant wealth expert sent us a data analysis combining the new Forbes richest family list and the Forbes billionaire's lists to figure out how many of today's billionaires are first generation, second, third and so on. The results prove the "shirtsleeves" adage—that family wealth seems to hit a cliff at the third generation.
Only 20 percent were second generation. Less than 10 percent were third generation, while only 13 families made it to the fourth generation, seven made it to the fifth generation and two made it to the sixth generation (Congratulations Whittiers and Yuenglings!).
Of course, the success rate depends mainly on the size and nature of the fortune. The Whittiers wisely set up their own family office-wealth management firm that has invested well. And the Yuenglings have the enduring allure of beer to thank.
But for the everyday millionaire, there are still some useful strategies for helping to make the family fortune stretch a little further.
Here are three tips from Anthony Fittizzi, managing director and wealth strategist at U.S. Trust.
1. Place your trust in trusts. Trusts are not only a great way to shield assets from estate taxes and capital gains taxes, they are also a great defense against family spendthrifts and playboys.
"A trust puts some protection around how the beneficiary can access the funds and can be a first line of defense against imprudent family spending," Fittizzi said.
Trusts can also insure that the values and wishes of the original wealth creator are carried out through the generations. And they protect assets from gold diggers and other non-family members who might try to make a money grab.
2. Beat Uncle Sam. Taxes always take a big cut of the family fortune over time. Fittizzi recommends tax planning that can include generation-skipping trusts, dynasty trusts and intra-family loans to help legally shield assets.
"You need to be cognizant of the financial environment and the legislation environment to stay ahead," he said.
3. Teach your children well. Wealth management firms have all jumped on the bandwagon of family education and next-generation programs—and with good reason. Bad investing decisions and poor basic budgeting can lead many families from "new money" to "no money."
Fittizzi said education programs shouldn't just focus on investing, though that's important. They should also focus on budgeting, spending and the responsibilities that come with holding multigenerational wealth.
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"The point is to help them understand that they are stewards of family wealth and they should be careful to consume only what they need because they have a responsibility to those who come after them," he said.
Today's rich don't necessarily want to create dynasties, he said. But they want their money to allow the second and third generation to have the freedom to do whatever job they want—whether it's low-paying nonprofit work or the arts—and not have to worry about paying the bills.
"They want to give their children and grandchildren the freedom to do good and not have to worry about the rent payment coming due," he said.
http://www.cnbc.com/id/101837456 —By CNBC's Robert Frank