The creators of family wealth may want the money they have worked so hard to accumulate to last forever, but more often than not, the wealth disappears by the third generation.

It’s one of the most vexing problems financial advisors have to deal with when serving wealthy families. Those experienced in this market, however, have developed a variety of strategies to preserve assets for the third generation and beyond.

“Most families don’t make the grade when it comes to preserving wealth across generations,” Stacy Allred, managing director and wealth strategist for the Merrill Lynch Private Banking and Investment Group, wrote in a recent study. “This unfortunate reality can so often be avoided by understanding pitfalls and developing a strategy.”

The recent Merrill Lynch study showed 69% of Americans with at least $5 million in investable assets want their money to last through their children’s generation and 43% want it to last through their grandchildren’s lives. Seventeen percent want the money to last forever.

But in more than two out of three cases, family wealth fails to outlive the generation following the one that created it, and 90% of the time the assets are exhausted before the end of the third generation, according to the report by Merrill Lynch’s Private Banking and Investment Group.

“Determining the purpose of your wealth, including how long you’d like it to last, is a critical first step,” Allred says. “With these insights, you can establish certain safeguards and back into a spending rate that may not deplete the family assets.”

Advisors to high-net-worth clients attack the problem in various ways; they say one of the keys is good communication between the parents and their children.

“You always hear about the shirtsleeves to shirtsleeves phenomenon where the money is gone by the third generation, but we are hopeful that early communication helps families become more successful,” says Donna Trammell, director of family wealth stewardship at Bessemer Trust in New York City. “The problem arises when there is a lack of preparation of the next generation.”

Bessemer uses peer groups for wealth creators and heirs. “Millennials are a phenomenal generation. They value communication and appreciate context,” she says.

One objective of the meetings is to encourage wealth creators to communicate the family history and philosophy to their heirs.

“It is never too early to start building a foundation for heirs. Parents need to give their children incremental responsibility so they can make mistakes before the stakes get too high,” Trammell says.

Allred noted in the study that many families establish a statement of values that describes the impact they want their wealth to have on themselves, their families and their community. “Being intentional about this process leaves them poised to make better decisions,” she said.

When asked when wealth should be transferred, 74% of respondents to the Merrill Lynch study said it should be when children reach a milestone, such as graduating, starting a career or getting married. Seventy-three percent also said the money should be given for a specific purpose, such as paying for college or buying a first home.

Giving Too Much
Clients who give too much to their children are a common problem in the financial industry, according to Coventry Edwards-Pitt, an advisor at Ballentine Partners, a multifamily office in Waltham, Mass., and author of Raised Healthy, Wealthy, & Wise—Lessons from Successful and Grounded Inheritors and How They Got That Way.

“Some clients are focused on giving money to children when they reach a certain age, but they should be focused on whether the child has the key factors for success,” she says. “The children should demonstrate they can earn their own money and live off of it. They should be able to set their own professional goals and not have their self worth wrapped up in the family’s wealth.”

That means setting limits and imposing rules on the children, which is often difficult for the parents. “Most of the industry is focused on how the children can handle the parents’ money, but no child feels successful in his own right until he has lived on his own,” she says.

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