A few years ago, the Williams Group said that 70% of wealthy families lose their fortune by the second generation, 90% by the third. That’s corollary to another assertion: the idea that the first generation creates the wealth so that the couple of generations after them can burn through it.

Part of the problem is that children might not always know how the wealth they are spending was created. In times of plenty, they likely think the money grows on trees. Another problem is the parents very often built their wealth with their children in mind, and they believe that spending, squandering, wasting on the kids—whatever verb you choose—was always the point.

They’ll follow this logic to the bitter end. Michael Ross of Financial Connection in Boca Raton, Fla., recalls a widow he worked with in the 1990s whose son had substance abuse problems, and he would ask her to cut big checks like $20,000, sometimes twice a year. “He was constantly hitting her up for money. I would get this call, ‘Son needs money.’” Investments were tapped and money shuttled to bank accounts. He was an only child and there were no siblings to complain. Ross warned her to no avail that she was likely running through her annual gift tax amounts.

Financial mediators say family wealth can be both tonic and poison to children, especially children with addictions like drug or alcohol problems (or perhaps a gambling itch), since money makes it easier to feed these problems, pursue harmful hobbies, or simply stay at home and do nothing.

But simply blaming the children for their failure to launch might be unfair when you put it in the context of today’s economy—when escape velocity is harder to achieve. Wages have lagged, while the price of things like food and housing have gone up. Many clients’ adult children entered the labor market during or shortly after the Great Recession when jobs were scarce.

Last year, the Federal Reserve reminded Americans in a paper called “Are Millennials Different?” that the younger cohort lags its predecessors in income. “Millennials are less well off than members of earlier generations when they were young, with lower earnings, fewer assets, and less wealth,” said the paper, written by economists Christopher Kurz, Geng Li and Daniel Vine. Gen Yers have higher levels of student debt and are less likely to own houses.

“Average real labor earnings for young male household heads working full time are 18% and 27% higher for Generation X and baby boomers, respectively, than for millennials after controlling for age, work status and a number of demographic variables,” the Fed authors wrote. “For young female heads of household working full time, these generational gaps in labor earnings are in the same direction but somewhat smaller—12% and 24%, respectively. For family income, the regression shows that Generation X and baby boomer households have a family income that is 11% and 14% higher, respectively, than that of demographically comparable millennial households.”

“In the last several years, we are encountering more and more situations where clients are needing to help their adult children,” says Bob Kargenian, president of TABR Capital Management in Orange, Calif. “Some of this may fall into the category of ‘aimlessness.’ … But most of it falls into the category of where the kids need the money. Several are living at home into their late 20s or even later; many perhaps don’t have enough income from their jobs, and so Mom and Dad help pay house payments and even college and high school tuitions, some of which run into the $20,000 and even $30,000 per year norms. Or they help with deposits on new homes, or even pay the mortgages of their kids. The list goes on and on, and has become more common in our practice.

“Living here in Southern California, and having our 25-year-old son attend New York University and graduate there in four years, the cost of housing is very different than for me 40 years ago,” Kargenian says. He says he sends the book The Gift of Failure by Jessica Lahey to clients, reminding them that letting their kids flounder is part of helping them grow.

Britta Koepf, an advisor with Practical Financial Planning in Chagrin Falls, Ohio, says, “When approaching a conversation with a parent who is providing excess assistance to their children, I frame this discussion around the future of the child, not the parent. In most cases, a parent is providing this support because they care more about their child’s future than their own, so focusing primarily on their financial well-being gets us nowhere.”

If the parents are destroying the terra firma of their own retirement, Koepf tries to flip the logic, and remind them that if they run out of money, they will end up hurting the children anyway, because the kids will end up taking care of or housing a future impoverished parent. “I frequently tell the clients that the best gift a parent can give their child is the confidence that they won’t end up needing to support their parents financially in the future. Most parents would hate to have their children discuss who will take Mom in when she runs out of money, but those conversations occur all the time.”

Financial literacy is a big problem with kids, who might not understand the double-edged sword of compounding—which showers blessings on investors and casts anathema on debtors.

Amanda McGrath at Asset Advisory Group in Kinnelon, N.J., says she frequently sees credit card problems among the adult children of clients. The parents don’t understand how big or bad the problem is.

“I’m 35, so a big part of my practice is meeting with the next generation, ages 20 to 40,” McGrath says. “What we’re finding with financial literacy not being taught as heavily as I think it should be in school … a lot of the kids, even though they are well-intended, don’t understand with credit card debt, the implications of it and why it should be paid off in full each month.” One set of her recently retired client couples asked McGrath to meet with their two daughters in their 20s. Each daughter is married and has children and each had $30,000 in credit card debt accumulated over time, starting from when they were young and shopping at places like Express and Best Buy and eating restaurant food. Later on, with children and families and increasing interest, they were having an impossible time paying down principal that had gotten out of hand. The parents had to gift them the money for the short term but didn’t want to wipe out the debt. “The kids are paying them back at a much lower interest rate than the 30% those cards were at.” It’s a fresh start, and the daughters are making the payments. “But it can be a drain on the couple.”

Forrest Baumhover at Lawrence Financial Planning in Tampa, Fla., says spendthrift trusts can keep money out of beneficiaries’ hands until they reach a certain age, handing out money when the child reaches certain milestones—age 25, 30, 35, etc. “The flip side of that is called controlling from the grave,” he says. If the child is already showing signs of responsibility—getting a job and starting a family and asking nothing, then the parents’ wills might be outdated and the thorny stipulations should be removed.

Lauren Lindsay, a CFP at the Westwood Group in Houston, says that she’s also seeing children get divorced and not have enough money to buy new houses, so they turn to the parents for financial help. “This has happened to several of my clients, and in one family to two children within a year of each other,” she says. “Divorce is expensive, and two households are more expensive than one, and many people don’t have a financial cushion so are coming and asking for ‘an advance’ on their inheritance.” It can unravel an otherwise successful retirement plan for the clients, she says.

Mike Kurz at Overshare Advice and Planning in Frisco, Texas, says in these situations his firm acts as a “connector” and “solver,” getting families in touch with other specialists—from doctors to counselors to attorneys. “We are not there just to say ‘no’ or tell the parents to not write the check,” Kurz says. “Oftentimes we have seen the parents are a bit lost and need direction to work through the process of even understanding the situation. It’s not uncommon to have one parent that is super empathetic and one that is much more resistant. They both have valid feelings and concerns but often can’t find common ground to address it and move forward.”

Kurz uses this methodology to handle this particular problem: First, the firm asks permission to have the personal conversation and tell clients it’s part of the planning. Once they have an open discussion, they get a point of reference. Then the firm begins investigating what resources the client might have to get the child through the issue—whether it’s an attorney for legal problems or a counselor or therapist.

“Now we can establish financial commitment along with boundaries,” Kurz says. “For instance, we can budget for $10,000 in legal fees and $2,000 in counseling. If it is a child that hasn’t yet found a job or has had an extended unemployment, we can help by reviewing their skills and résumé to help position them in a better light. We write articles, blogs and marketing pieces so we have the skills to offer suggestions. We can also connect them with professional services for résumé writing and job searches.”

Families dealing with stress “hit neutral,” he says. “This is to say, they may normally be great at researching online for resources and making decisions, [but] now suddenly they can’t take the next step without help; they need a hand to hold and assurance they are making a good decision. We document the process and steps the family would like to take in order to move forward. This can help keep everyone on track along with having full transparency to the children on how the parents are going to handle the issue.”

He says the firm is also there to play bad cop if necessary for the parents. “In this scenario, the parents simply say, ‘We love you and we are here for emotional support. Unfortunately, we can no longer pay for these services or for these items or for these mistakes. We have spoken to our financial planner on multiple occasions and this is all we can do.’”

Where Money Meets Addiction
Financial advisor Catherine Seeber finally had her eyes opened to her son’s addiction to pills when she discovered he had taken money out of her purse. It was irrefutable evidence of his drug problems.

Part of the problem was his college engineering program, which required a familiar cocktail of drugs to both stay awake and go to sleep. But she also says that he’d had self-esteem problems as a youth and that drugs had been a problem before that. “It was a 10-year battle,” says Seeber, a CFP with Captrust based in Lewes, Del.

Since she started speaking about it, she’s become a magnet for other advisors in the industry wanting to talk about addiction issues with clients and about the financial devastation that the problem can wreak on families.

“I had 17 different bills to pay during my son’s most difficult years,” she says. “I only have one left now. … I was one of the lucky ones because I knew how to negotiate with the various facilities. I worked in the financial department as an accountant at a psychiatric hospital for 10 years prior to studying for my CFP and becoming a financial planner. There are resources available that people need to be aware of and think about before the crisis.”

There’s usually not one road to chemical dependency, and concentrating on the drug problem itself is usually not the right approach.

“In my humble opinion, it’s not the only issue that they are dealing with,” Seeber says. “In my son’s case, it was low self-esteem and desire to always be the best at everything. There was depression associated with that.” 

Addiction poses special problems for the wealthy, a world of access in which people can feel invincible, she says, and it puts them at more risk: “They think that they can pay their way out—that they can fix it with money.”

She was acquainted with the late chef Matt Haley, a Delmarva owner of multiple restaurants who turned his life around with cooking after a stint in prison, where he’d landed for drug crimes. While incarcerated, he realized he wanted to be a chef. He “not only became a success,” says Seeber, “but he [had] probably 13 different restaurants where he hires those that have struggled. And he became so famous and had so much money that it scared him. He didn’t want it. He viewed money as dirty. So he didn’t want any money in his bank account, and he kept giving it away. So he would set up orphanages in other countries.” (Haley was killed in a motorcycle accident in India, reportedly while on a humanitarian trip.)

Seeber says addicts feeding their habits lose their concept of money, and that’s a rude awakening when they become sober. It’s led some innovators in this space to come up with things like the Next Step card—a credit card with controls that keep users from spending money at liquor stores and bars.

Once someone becomes sober, their records are hurt and it’s hard to get integrated back into society. They have crushing debt. “They are 10 years behind their peers,” Seeber says. “And there’s not enough support in that financial reckoning.” It’s important, she says, that former addicts surround themselves with people who have been there, including employers who have a keen understanding of what’s happening.

Marc Kantor, an interventionist with South Florida Intervention in Boca Raton, works with families, especially high-net-worth families, with members addicted to drugs or alcohol, or with process addictions to things like shopping, gambling, sex or food. “They use me to come into the family system. And the goal is to nicely ask … We’re all there with love to ask the individual to accept treatment.” He spends a lot of time working up to the treatment, getting to know the addict, getting to know the family and siblings, best friends, therapists and employers. “I help them go from chaos to organization and to the appropriate level of care treatment.” His clients might be everyday professionals or the children of billionaires.

Part of his job is to help families set boundaries and not further enable the family member’s disease with money. “Parents sometimes think that if my kid or spouse has all the trappings of a good life, then I’m being a good parent.” Often the treatment requires pulling the addicted family members out of their immediate environment and relocating them, perhaps to a detox center across the country, he says. “Wealth gives people access. It gives them privilege. It’s certainly a lot easier to be ‘doctor shopping’ or buying drugs or evading consequences when your family has money.”