Studies estimate the baby boom generation is set to inherit $11.6 trillion over the next 20 years from their parents. The baby boomers are expected to pass on as much as $41 trillion to their children. With all this wealth changing hands, it’s a shame most heirs will not be able to hang onto it.
Sudden Wealth Syndrome is a term first used by psychologist Stephen Goldbart to describe the stress, guilt, social isolation and confusion that often accompanies a giant windfall. The term is generally used with lottery winners and professional athletes but the problem can affect those who inherit a large estate but have had no experience handling money on their own.
According to the Boston College Center for Retirement Research, two-thirds of baby boomers will inherit family money over their lifetime. Unfortunately, research shows only 30% of inherited wealth remains to be passed on to the next generation. Less than 10% makes it past the third generation.
Ecclesiastes 2:21 “For a person may labor with wisdom, knowledge and skill, and then they must leave all they own to another who has not toiled for it. This too is meaningless and a great misfortune.”
The most common reason is many heirs are simply inexperienced at handling money. If they have not been able to save anything on their own they are unlikely to be able to keep their inheritance for very long. According to Dr. Thomas Stanley, author of the Millionaire Next Door, most people become rich by spending less than they earn. His research found the average millionaire saves 20% of their income and have done so long before they were a millionaire. They live on a budget which is how they were able to control their spending to the point they could save 20%.
Many people who inherit a large sum of money will go on a shopping spree without considering the impact spending principal could have on future income. A million dollars can buy a lot of things. However, once it’s spent, it can no longer produce income. A wise heir should think of their inherited wealth in the terms of the income it could provide for the rest of their lives. Using the 4% rule, a million dollars is really an income stream of $40,000 per year.
Estate planners and financial advisers can only do so much to help clients preserve their wealth. Minimizing estate taxes and probate costs may be the easy part. Sheltering the wealth from spending is more difficult. Parents will need to be involved with training their children and grandchildren to handle wealth if they want to break the cycle of lost inheritances.
Parents should be involved in their children’s money decisions at an early age. Teach them to save and invest and control their spending. Allow them to be involved in the family budget when they are old enough so they learn how to set it up and operate it. Take them to meetings with your financial adviser and encourage them to ask questions.
The Williams Group surveyed more than 2,000 affluent families over 20 years, searching for an explanation to the boom-and-bust syndrome. Their study reports 25% of the time, the main reason turned out to be the families’ failure to prepare heirs for their pending prosperity. Many of the heirs were not aware of their financial good fortune until their parents passed away. A 2012 study by U.S. Trust found more than half of high-net-worth parents had not fully disclosed their wealth to their children, while another 13% kept completely silent.
Some parents justify their silence out of fear the knowledge may create a brood of spoiled lay-abouts. A better plan is to start a gifting program with adult children to allow them the opportunity to manage money under your supervision. Fund their Roth IRAs as soon as they have earned income to start them on the path to a secure retirement. Help them select their investments and watch them grow. Teach them the importance of future income streams and how spending principal cuts off that income.
Creating wealth is only the first step. If you want to preserve it for future generations you will need to invest time with your heirs to train them how to manage it and preserve it for their children.
- Research shows only 30% of inherited wealth remains to be passed on to the next generation.
- The average millionaire saves 20% of their income and has done so long before they were a millionaire.
- Future heirs should be taught to think of wealth in terms of the future income it will produce. Not as a lump sum of money to be spent.