Family Money and Inherited Wealth

We Americans tend to fear and diminish family money.  We also confuse it with inherited wealth, two terms that I like to keep separate.  “Old money”, “Trust fund baby”, “Rich snob”, “Spoiled rotten”, “Bum.  These are all things we’ve heard people with inherited money called.  In other parts of the world, particularly European countries, society has no problem with family money and often view it as a source of pride instead of something to belittle.  Americans have strong ideals regarding merit and hard work being the source of success.  I’m fully on board with that.  After all, no one likes seeing a brat with a silver spoon just handed the keys to the castle.

Having family money feels like cheating, because the playing field is not level.  However, here’s the dirty little secret: there is no such thing as a level playing field and there never will be.  Everyone has certain built in advantages and built in disadvantages, and some people have more advantages than others.  Assuming that you buy that argument, the next logical question is, “How do I tilt the playing field in my and my family’s direction?”  While most of us support the ideal of equality of opportunity, in the end, we all want our own families to be successful.

We need to break through this mentality of family money being bad.  I want the future generations of my family to be part of a Great Family.  This goes far beyond wealth, but having wealth makes all of the other, more important components of being a Great Family much easier.  Building the right attitude regarding family money in both ourselves and in future generations can make the acquisition and growth of family money easier.

The Downfalls of Inherited Wealth

The downfalls of inherited wealth have been well documented, but let’s rehash some of them here:

  1. Guilt: Guilt is probably the most common emotion for unprepared individuals who receive a windfall. Unlike lottery winnings, for example, an inheritance is the result of the loss of someone you (hopefully) loved.  Feelings of “why do I deserve this money” and “I didn’t earn it” are common.  Beyond the feelings of not deserving the money, thoughts about the impact on your social standing are common as well.  What will my friends think of me if they find out how much money I have?  How does this impact my relationship with my family?  Will everyone I know around me be jealous?
  2. Ignorance/Uncertainty: I work in the money management field, so I would be comfortable inheriting a large pot of money (alas, I will not).  The vast majority of people do not have the same level of education, experience, and comfort with money as I do.  Falling into a large sum of money is scary and intimidating.  What do you do with it?  Does this mean you’re rich and no longer have to be concerned with your expenses anymore?  How do I even start to think about investing?  The biggest risk is in not realizing how little a “big pot of money” actually is.  A million dollars sounds like a lot, until you realize that you can only safely take $25,000-$35,000 per year and still make it last.  Suddenly, that huge sum of money is not so big anymore.
  3. Affluenza: Of course the corollary to not realizing how much money is a lot is the belief that you can now live it up and buy everything you couldn’t afford before. An $80,000 Tesla Model S was out of reach before, but now it can be yours!  That fancy million dollar home with its huge property tax and utility bills – within reach.  Thinking that buying all of these new toys will make you happy is a common reaction, until you’re done and realize that a new house and a new car are not the secrets to happiness.  Money tends to amplify who you were before you had money.  If you were a good person with a happy life, odds are high that with money you can be an even better person with an even happier life.  Unfortunately, the opposite is also true.
  4. Making decisions too quickly, or freezing up: The recent $700 million Powerball winner claimed her prize and immediately quit her job.  My guess would be a new house and a new car are coming soon as well.  This is probably a big mistake.  Making decisions when you’re either guilt-stricken or in a state of delirium is a bad idea.  The best course of action is often to just park the inheritance in US Treasury Bills for six months (if it’s all cash) or just keep the same investments (if they’re reasonable) until you’ve digested your new situation.  Alternatively, you can’t just keep the inheritance in a checking account for years on end.  At some point, you will have to make a decision about what to do with it.
  5. Lack of Initiative: Possibly the biggest risk of any inheritance is the possibility of losing initiative and not living life to your full potential. This is an issue we think about a lot in my family, especially when it comes to things like paying for college or helping provide a jumpstart in life.  To some extent, not having wealth can be a motivator for those with proper drive and grit.  After all, why work so hard when you’ve already got more than enough money in the bank?  On the flip side, the common belief that those who inherit wealth will not do anything with their lives is not true.  David Rockefeller (grandson of John D. Rockefeller) became CEO of Chase Manhattan Bank and was one of the most prominent philanthropists in America.  Julia Louis-Dreyfus (Elaine from Seinfeld) has a pretty remarkable family, with her father worth an estimated $3.5 billion when he passed away last year.  Despite that, she seems to have done alright for herself.  Wealth by itself is not necessarily an initiative killer.

All of the above downfalls are pretty common.  But do you know what else is pretty common?  Not preparing your heirs for what is to come!  How many times have you heard stories about adult children not realizing how wealthy their parents were and only finding out once they passed?  This should never be the situation, and if you plan to be wealthy and leave something to future generations, it’s up to you to let your children and grandchildren know, and to begin the proper training so they will know how to handle their new found wealth when the time comes.

The Difference in Family Money and Inherited Wealth

Family money and inherited wealth are two very different things, and require two very different attitudes.  Family money is money that is used to advance the collective goals, interests, and values of a family, as opposed to any one family member freely spending away.  Family money can be legally separated, or can be transferred to a set of individuals who have been prepared to handle the money and have the attitude that they are merely stewards of the capital for future generations.  For example, the use of generational trusts to preserve wealth as well as the use of limited liability corporations (LLCs) and other special investment vehicles (SIVs) to pool family members’ capital help to preserve and grow family money.

More important than the legal structure however, is the attitude a family has regarding wealth.  All money is family money, and that includes thinking beyond just one or two generations.  My goal is to build a lasting legacy so that my great, great grandchildren have a solid foundation and a leg up from the rest of their peers.  I do not want to accidentally promote some of the downfalls of inherited wealth discussed above, but I do want my family to benefit in the future from the work I put in now.  Passing on the proper attitude to my kids and my grandkids regarding family money is crucial, so that they may pass along a similar attitude to their kids and grandkids.  This is how Old Money stays Old Money.  From the time the children of wealthy families are very young, they learn and develop the proper mindset to ensure that the wealth not only passes beyond their generation to the next, but grows as well.

Inherited wealth, on the other hand, is more specific to an individual, both legally and generally.  This is the default transfer of wealth in the United States.  A parent or grandparent dies, and leaves each individual member of the family part of their money.  That money is free to be spent in any way the heir sees fit.  There are no discussions about protecting the wealth for two, three, four, or more generations in the future.  There are no discussions about preserving and growing that wealth and no training on how that would be accomplished anyway.  In most cases, it’s gone within that generation, if not within a few years.  Sadly, the opportunity to build a strong foundation for future generations is lost.

Preparation is Key

Preparation and training are key to the successful transition of wealth from one generation to another.  There are several steps that can be taken to ensure that the transition goes smoothly.

  1. Try Not to Raise Spoiled Brats: Sometimes this is easier said than done. Raising your kids to understand the importance of hard work, grit, frugality, and modesty will all help them handle large sums of money later in life.  Giving them everything they want as they are growing up will set up an entitlement mentality and will not teach the value of earning the things you need and want.  Teach them how to spend properly as well as how to save and invest properly, and you’ll help prevent the Kim Kardashian syndrome.
  2. Talk to Your Kids Early and Often: If you expect to earn and create substantial wealth in your life, then talk to your kids about it early and often.  My family is not wealthy, but we have a seven figure net worth, earn a high income, and are still in our 30s.  Barring anything catastrophic, we expect to be fairly wealthy when we ultimately kick the bucket.  We are also teaching our kids about how to handle money, how to invest and plan for the future, how to work hard, be frugal, and how to have modesty and gratefulness for the wealth we have.
  3. Get the Legal Framework in Place: Developing the estate plan and communicating how it looks to your family will help prevent bad feelings or conflicts later.  Distribution policies, minimizing taxes, and preserving assets can all be set up well in advance.  Above all else though, include everyone in the process and ensure maximum flexibility, as family circumstances can change.  Make sure that no one is caught off guard.
  4. Use Charity as a Teaching Tool: Odds are high that you will not want your children or grandchildren to inherit all of your wealth. Charitable giving will play a role as well.  Use this to your advantage.  Charitable giving can provide several teaching tools.  It helps promote the sense of obligation, as an owner of large wealth is merely a steward holding and managing capital for others.  It also creates that feeling of gratefulness that can help ground an individual and make it more likely that they will preserve the family’s modesty in the future.  On a practical level, it can help illustrate investment decisions relating to income distribution and wealth preservation, as well as the legal and practical structures associated with it.
  5. Assemble a Great Team: Not everyone will have the inclination nor the natural skill set to handle large sums of money.  Even for those with the proper skill set, managing money can be time consuming and tedious.  Assembling a great team for you and your heirs will help alleviate that burden.  CPAs and lawyers should be a part of any team.  Investment managers can also be valuable.  But most importantly, look to find mentors for your children and grandchildren.  Mentors should relate well to the mentee and help provide sound advice when needed.

Be a Servant Leader

Above all else, helping your family develop the proper attitude around wealth will be the most important step in preserving family money.  Family money is not something to be ashamed of, nor is it something that should allow you to coast on auto-pilot.  Instead, family money is merely a tool, and how well you do in life depends on how well you use the tools at your disposal.

Having large sums of wealth is a responsibility, and it helps to develop an attitude of servant leadership for your family.  Servant leadership is the concept that you are a servant first and a leader second.  The servant leader is focused on the well-being of the family and broader community around them first, and themselves second.  The servant leader does not hoard power, but rather shares it as broadly as possible and involves as many people as possible in the decision making process.  The servant leader inspires others, but also adds clarity to the mission when needed.  Most importantly, a servant leader is persistent and holds themselves and others accountable.

Family money is different from inherited wealth, and it is up to you to make sure the difference is understood and followed by your family.  Inherited wealth tends not to last long, while family money lasts generations.  Creating proper legal structures and proper lines of communication will ensure that your family does not fall into the traps of inherited wealth.  Instead, set your family up to see family money as a tool to help create a Great Family.

Keep building my friends.


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