Statistics reveal that 70% of rich households lose their wealth by the second technology, and 90% have exhausted it by the third. For households who’ve spent many years constructing profitable companies, accumulating actual property portfolios, or producing substantial earnings, this signifies a devastating erosion of wealth legacy.
Nevertheless, in keeping with Steven Bowles, CLU®, founding father of Catalyst Advisory, this end result may be prevented. After spending seven years working inside a household workplace advisory group that serves ultra-high-net-worth households, Steven has seen firsthand what distinguishes households who create lasting legacies from these whose wealth dissipates inside a technology or lower than two.
“Wealth destruction throughout generations is the results of particular, preventable errors,” he explains. “The households who succeed long-term perceive that defending wealth requires as a lot intentionality and technique as constructing it within the first place.”
Understanding the Two Main Threats
Steven identifies two basic forces that destroy household wealth: erosion and division.
Erosion
Erosion primarily happens via taxation. Beneath present legislation, estates valued above roughly $13.99 million for people or $27.98 million for married {couples} ($15 million /$30 million in 2026) are topic to a 40% federal property tax on quantities exceeding these thresholds. Though latest legislative modifications have offered some aid from scheduled reductions, the tax nonetheless considerably drains household wealth.
“If you take a look at stability sheets of rich households, particularly those that’ve constructed wealth via companies and actual property, you notice how shortly property taxes can devastate a household’s monetary legacy,” Steven notes. A household price $50 million would possibly face property taxes within the hundreds of thousands. With out liquidity to pay these taxes, they’re compelled to promote belongings, usually at unfavorable phrases.”
The erosion difficulty worsens for households holding illiquid belongings. Actual property buyers and enterprise house owners usually discover themselves “asset wealthy however money poor.” When property taxes are due inside 9 months of loss of life, households missing ample liquidity face powerful choices.
Division
Division poses the second main menace when wealth is given on to beneficiaries with out sufficient safety. As soon as belongings go straight to heirs, they turn into susceptible to dangerous choices, divorces, lawsuits, and collectors.
“I’ve seen it numerous instances,” Steven says. “A profitable first technology builds substantial wealth, then distributes it on to their kids. Inside just a few years, that wealth is gone. Not essentially as a result of the youngsters are irresponsible, however as a result of they weren’t ready for all times circumstances or enterprise failures that depleted the belongings.”
Why Conventional Approaches Fail
Many households observe the “do nothing” strategy. They construct wealth however don’t use formal methods to guard it. Typically they’ve a easy will, however nothing extra superior.
“Permitting a major inheritance to cross on to your kids with out construction creates issues,” Steven warns. “It exposes them to dangers they is probably not geared up to deal with.”
Conventional property planning normally divides belongings equally amongst heirs with out contemplating household relationships, particular person expertise, or asset sorts. For instance, a enterprise making up 80% of a household’s web price is likely to be break up amongst siblings with totally different pursuits or skills to handle it.
Maybe most significantly, many households don’t talk successfully throughout generations. Wealth creators who’re first-generation buyers, usually preoccupied with growing their wealth, might overlook the significance of teaching their kids about managing wealth, understanding the roots of the household’s prosperity, or the core values that fueled their accomplishments.
The Lacking Ingredient: The Household Structure
Past authorized frameworks, profitable multi-generational households use one thing Steven calls a household structure. This values-driven construction guides how wealth is managed and handed on.
“A household structure isn’t a legally binding doc,” Steven explains. “It’s a press release of values, expectations, and ideas that information the household’s relationship with wealth. It solutions questions like: What will we consider about cash? What obligations include being a beneficiary? What alternatives ought to wealth create for future generations?”
This doc works alongside trusts and authorized buildings to create a framework for wealth preservation. It’d define expectations for work ethic, schooling, or charitable giving. It may set up processes for accessing household assets or making main monetary choices.
The structure good points explicit energy when paired with early property planning. Somewhat than kids discovering their inheritance solely after a mother or father’s passing, they be taught in regards to the household’s wealth technique early on, their future roles as stewards, and their alternatives.
“The households who do that nicely aren’t elevating children who really feel entitled to wealth,” Steven notes. They’re elevating children who perceive they’ve a duty to protect and develop what they’ve inherited, and to arrange the subsequent technology to do the identical.
Strategic Instruments for Wealth Preservation
Households can make use of a number of highly effective instruments to interrupt the three-generation curse. They need to perceive the threats and the significance of values-based planning.
Irrevocable Trusts
Irrevocable trusts are among the many simplest instruments for transferring belongings out of the taxable property whereas sustaining management over how these belongings are used for future generations. Not like revocable trusts, which stay a part of the property for tax functions, irrevocable trusts set up a authorized separation between the grantor and the belongings. When appropriately arrange, these trusts can final for a number of generations, providing advantages to heirs and shielding belongings from taxes, collectors, and poor monetary choices.
Steven often recommends that these trusts embody HEMS provisions, which enable distributions for Well being, Schooling, Upkeep, and Assist.
“This strategy offers for beneficiaries’ real wants whereas stopping them from merely liquidating the belief for poor causes,” he emphasizes.
Superior methods embody normal companion and restricted companion buildings that allow discounted valuations throughout asset transfers.
“When you have non-voting shares or restricted partnership pursuits, you may usually transfer a greenback of worth utilizing solely 60 or 70 cents of your exemption,” Steven notes. That degree of effectivity can save households hundreds of thousands in property taxes.”
These multi-generational trusts, usually known as dynasty trusts, can final for many years or centuries, relying on state legislation. As an alternative of being taxed and divided with every technology, the wealth stays protected and grows throughout the belief construction.
Life Insurance coverage as a Liquidity Resolution
Life insurance coverage is a vital property liquidity instrument for households with vital illiquid belongings. Steven noticed that this technique is often utilized in his household workplace work.
“For those who personal $100 million in actual property and companies, your property will owe substantial taxes,” he explains. “With out liquidity, your loved ones is compelled to promote properties or enterprise pursuits shortly, usually beneath market worth. Life insurance coverage creates tax-free capital exactly when it’s wanted most.”
Steven often recommends premium finance methods for ultra-high-net-worth households, using financial institution loans to fund life insurance coverage insurance policies held in irrevocable trusts.
“Banks will lend cash to trusts with acceptable collateral,” he notes. “This enables households to create substantial loss of life advantages with out depleting their very own capital.”
The insurance coverage coverage is structured with excessive money values that develop over time to cowl the financial institution mortgage, leading to a fully-paid coverage that gives liquidity upon loss of life. In the meantime, the loss of life profit stays outdoors the taxable property as a result of the belief owns it.
“For an actual property investor with a $50 million portfolio, a $10-15 million life insurance coverage coverage in an irrevocable belief is likely to be the distinction between the household retaining the properties or having to liquidate every thing,” Steven says.
Correct Enterprise Structuring
Steven highlights the significance of correct entity structuring as households construct wealth via actual property and enterprise investments.
“Sooner or later, should you’re severe about constructing wealth outdoors the normal W-2 and financial savings accounts, you might want to construction your self extra like a enterprise,” he advises.
That might contain holding corporations, LLCs for numerous properties, or GP/LP buildings supporting asset safety and easy wealth switch.
These buildings serve numerous capabilities. They safeguard belongings from legal responsibility, allow relations to purchase possession stakes, and permit for discounted transfers to trusts via valuation strategies.
For enterprise house owners, funded buy-sell agreements present important safety.
I’ve seen too many companies with out correct succession plans,” Steven notes. “A sudden loss of life creates chaos. Companions or heirs are compelled to scramble. A correctly funded buy-sell settlement, usually utilizing life insurance coverage, ensures enterprise continuity and truthful therapy of all events.
Legacy By Design, Not Default
The three-generation curse shouldn’t be an unavoidable destiny. It’s the anticipated end result of neglecting the dual risks of abrasion and division, however it may be overcome via cautious planning, diligent work, and meticulous monetary structuring.
Households who efficiently switch wealth throughout generations achieve this via planning that includes authorized buildings, tax methods, asset safety, and values-based schooling. By understanding that the wealth they’ve constructed deserves the identical focus, plan, and function in the course of the switch because it did in the course of the accumulation, many households have confirmed able to preserving and constructing upon it.
“I’ve labored with households who’ve carried out this brilliantly,” Steven displays. “The wealth continues to develop, every technology has alternatives that the earlier technology created, and there’s a real sense of stewardship fairly than entitlement. That’s what multi-generational wealth appears like when it’s carried out proper.”
For households constructing wealth, the message is obvious: your planning right now determines whether or not your legacy lasts many years or disappears inside a technology. The curse is actual, but it surely’s additionally completely preventable.
