The Upcoming Generational Transfer of Wealth

Eleven million households currently exist in the United States in which the estimated amount of wealth that will be transferred from parents to children will exceed $1 million.

As has always been the case, the wealthy households have been concerned about the effect that gifting large sums of money, be it directly with no strings attached, or through a professionally managed trust fund that makes regular distributions to their children as beneficiaries, may have on their children.

These concerns are usually three-fold:

First, that the children will squander the value of the resources that the parents spent a lifetime accumulating;

Second, that the children will lack a work ethic and/or otherwise lead unproductive lives due to the lack of necessity in working; and/or

Third, that the access to significant funds can facilitate the development of vices–drugs, alcohol, and unscrupulous lovers drawn to the wealth, if the beneficiary so discloses it.

Historically, the response to these concerns was to hope for the best, with the parents choosing to assume that their parenting passed along the necessary virtues to be good stewards of their parent’s capital.

Beginning in the 1950s, those with inflation-adjusted fortunes of $2.5 million began to set up a series of trusts for their children with set amounts distributed regularly and large lump-sum payouts tied to specific age or life milestones.

Now, in the past ten to fifteen years, a small cottage industry has arisen in which financial planners at the largest wealth management firms have been provided guidance and counseling to the children that stand to inherit substantial sums of money.

Notably, this is all happening in a stealth manner, by way of word-of-mouth conversations between the parents/creators of the trusts and their pre-existing relationships with accountants, advisors, and attorneys. There is almost no advertising for these types of services, and even prominent estate and wealth management firms like Northern Trust do not prominently display the existence of these services (though you can find it on their website and in their white papers if you do some digging).

This marks a critical change in how the wealthy are approaching the intergenerational transmission of wealth.

The issue, in the eyes of the wealthy, is this: How do you offset the loss of human capital when the person who built the wealth is no longer alive to provide guidance and support? The recent trend is to hire financial advisors from institutions like Northern Trust or U.S. Bank to tutor their children in the ways of preserving and maximizing the portion of the fortune that they stand to receive.

These advisors provide unique instruction in two areas:

The first relates to regulation and tax policy. If the assets are held in trust, the advisors highlight the credit protections, tax consequences, and any regulatory details if there are family operating businesses that form part of the wealth transfer.

The second relates to the wise stewardship of the capital that will be inherited. The good news is that this information is accessible to anyone who seriously studies wealth accumulation, even as a hobby.

The wise stewardship is generally broken down into two categories: (1) the avoidance of permanent capital losses, which largely occurs by teaching the children of the wealthy about the cyclical nature of markets and the ebb and flow of business results, and the tragic results that typically await those who sell in panic; and (2) the need to recognize that no fortune is unlimited, and annual spending needs to be kept within the limits of the income that the trust throws off–i.e. Live within the means of what is provided to you.

These efforts are providing the children of the wealthy with not only future wealth, but also, financial literacy about how to steward the wealth that awaits them.

For those who are not born into such circumstances, the need to acquire the knowledge to be successful burns as strong as ever. The schools and culture at large are not teaching financial literacy, and the affluent are quietly increasing the intensity with which they teach their children about how to wield large fortunes. Mark Twain once remarked that he didn’t let his schooling interfere with his education, and those who are not born into families of means will have to develop a similar appetite for self-education if they wish to carve out an economic sphere of influence over the course of their lifetimes.