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Family wealth

How to beat the three-generation ‘curse’

ANZ Private

2023-05-26 00:00

It can take a lifetime of hard work and dedication to build family wealth but just two generations to lose it. While it’s not uncommon for a family’s third generation to find themselves back where their grandparents started, it’s a fate that can be avoided with careful planning.

Most Australians hope to see their children and grandchildren enjoy long, fulfilling lives and do better financially than they did. Being able to pass along wealth is a tangible way for some Australians to leave a legacy.

But how ‘lasting’ will that legacy be? Not as long lasting as you might expect. About 70% of a family’s wealth is squandered by the second generation, and by the third generation it’s 90%, according to a widely quoted longitudinal study of 3,250 families conducted over 25 years by US wealth consultancy The Williams Group in 2002.disclaimer

In simpler terms, this research shows that only one in every 10 families can expect to see their wealth last beyond their grandchildren’s generation.

There are a few theories for this widespread phenomenon, from the first generation failing to get their estate planning in order, to the third generation being clueless about money. But regardless of the reason, one thing is certain: anyone hoping to make their wealth last more than three generations need to make a plan.

The ‘shirtsleeves to shirtsleeves’ problem

This rapid erosion of wealth is so well known that it has its own Chinese proverb: wealth doesn’t pass three generations. It’s also spawned a saying in English: “From shirtsleeves to shirtsleeves in three generations.”

So why does this happen with such frequency? There are a couple of theories. One is that each subsequent generation has less understanding of the work involved in building and maintaining wealth than the previous one.

The generation that first builds their wealth does so through grit and determination, according to this theory. In pulling themselves up by their bootstraps, they understand the value of their work and wealth more deeply.

The next generation still has some idea of the trials their parents went through to build the family’s wealth. They may have childhood memories of the long hours and dedication of their parents to get ahead. Although they’re accustomed to a better quality of life, they know that wealth isn’t cheap and are relatively savvy with their money.

The third generation, however, will have grown up exclusively in the lap of luxury and have no reference point for the labour of their parents and grandparents. As a result, the value this generation places on money and wealth is significantly less than those who came before.disclaimer

How families leave lasting legacies

Some families have successfully broken this ‘third-generation curse’ to create truly lasting wealth for their heirs. So how did they do it?

A common characteristic among these institutionally wealthy families is they see themselves as custodians of their family’s assets. Although they benefit from this wealth, it’s not exclusively theirs. Instead, this wealth is part of a larger legacy that they have a duty to maintain.disclaimer

Importantly, they’re also more likely to plan ahead – and plan early.

One of the biggest challenges that families who are newly wealthy face is that the entrepreneurial mindset – which may have helped them build their wealth – doesn’t lend itself to estate planning.

Wealth creators often find success because of their focus on and commitment to their business, rather than a dedication to making money. They are often willing to take risks for the right rewards, and they back themselves to make the right decisions.

Making wealth last, on the other hand, requires giving some attention to the wealth itself, not just the work which created it. And while it’s reasonable to take on some risk when managing a portfolio, these risks may not be as great as an entrepreneur might take with their business.

It can also be difficult for these wealth creators to acknowledge their own mortality. Some believe they still have decades to plan their wealth transfer, even into their 70s.

Key considerations for making wealth last

Family make-up

Modern families are dynamic. Hook-ups, break-ups, births, deaths, and divorce can have confusing consequences for your wealth plan. You’ll need to consider how your family’s composition might change in the future and how you can safeguard your vision for your wealth in the face of those changes.

Tax structures

Depending on how your assets are held and transferred, the tax bill associated with your wealth transfer can vary wildly. For example:

  • Gifting some of your wealth prior to your passing can reduce the tax owing on your transfer.
  • Holding your assets in a company structure will mean you pay tax at a corporate rate instead of the often-larger individual rate.
  • Assets held in trusts are usually taxed in the hands of their recipient in the year that money was earned, irrespective of when the income is paid to the beneficiary.

Importantly, the benefits afforded by each different structure often come with a trade-off. Using a company structure, for instance, may lower the tax paid on assets held within it, but will mean forfeiting the 50% capital gains discount applied to assets held for longer than 12 months. 

These structures can also play an important role in asset protection. Placing assets into a company structure, for instance, can enable greater flexibility to transfer ownership as shares in the future, while a testamentary trust can provide greater surety that assets will be inherited by a specific beneficiary.

A trusted adviser

An important step towards preserving family wealth over several generations is putting a wealth transfer plan in place. A private banker can help you facilitate conversations with your family. Planning ahead can help your family avoid becoming a statistic in the three-generation curse! 

How to beat the three-generation ‘curse’
Banking specialist
ANZ Private

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C Taylor, ‘A little honesty might preserve the family fortune’, 29 June 2016, Reuters, accessed 6 January 2023


D Kleinhandler, ‘Generational Wealth: Why do 70% of Families Lose Their Wealth in the 2nd Generation’, Nasdaq, 19 October 2019, accessed 16 December 2022


M Darbyshire, ‘The first-gen wealth creators who struggle to talk to their kids about money’, Financial Times, 10 May 2019, accessed 16 December 2022