“The successful giver knows it is better to give an orchard than a harvest.”
–Kim Butler and Kate Phillips

This article has been exerpted/adapted from the forthcoming Family Banking Book.

An inheritance is a gift—not an obligation, but there is a strong cultural tradition of leaving an inheritance, at least, if there are assets to be left. However, it’s a tradition that can no longer be assumed to be “the way things are.” Many working and middle-class folks already feel they have under-saved for retirement, never mind an inheritance. Other parents question if their gift will be used wisely, causing a majority of givers to remain silent about the details, fearing it could sabotage their children’s ambitions or independence. And ultra-wealthy have been making headlines as they re-think how—and how much—to give.

In spite of “the great wealth transfer” from Boomers to Millennials that is already underway, the percentage of retirees who say they will leave an inheritance is on the decline. A 2013 HSBC survey of more than 16,000 people in 15 countries found American retirees were less likely to leave an inheritance than retirees from other countries: 56 percent of Americans vs. 69 percent of retirees around the world. (Interestingly, India topped the charts, with 86 percent of retirees surveyed planning to leave an inheritance.)

A more recent (2017) U.S. investor survey reported in a CNBC.com article found that only 40 percent of baby boomers are planning to leave an inheritance. Unfortunately, 68 percent of their millennial children are expecting an inheritance, indicating our culture’s inability to discuss money.

Apparently, the retiree shirts and slogans saying “I’m spending the kids’ retirement” weren’t joking after all.

Will an inheritance be use wisely or wasted?

Many Americans spend their inheritances at a stunning rate. “It takes an average of 19 days for the recipient of an inheritance to buy a new car,” asserts Rhys McCarney Ph.D. when discussing the issues of sudden wealth. One study based on survey data from the Federal Reserve and a National Longitudinal Survey funded by the Bureau of Labor Statistics found that one-third of heirs had negative savings within two years of the gift.

“The vast majority of people blew through it quickly,” says Jay Zagorsky, economist and research scientist at The Ohio State University and author of the study. “Americans who receive an inheritance save about half of what they get and spend, donate, or manage to lose the rest.” (And to be fair, the inheritances in question were often quite small—under $10k. The larger the inheritance, the longer it lasted.)

When U.S. Trust surveyed individuals with more than $3 million in investable assets to find out how they are preparing the next generation for handling wealth, the reasons for the decline in inheritances became obvious. According to Chris Heilmann, U.S. Trust’s chief fiduciary executive. “Looking at the numbers, 78% feel the next generation is not financially responsible enough to handle inheritance.”

Additionally, 64 percent admitted they have been largely silent on the topic of money, leaving even their adult kids in the dark—even if they will likely convey a sizable inheritance. Some families just don’t discuss money. Others worry their children could become lazy or entitled. Some are concerned about confidentiality.

One question seems to be, “Why leave a trust fund to someone you’re not sure you can trust with money?” Even more important questions are, “How can I help my children become ‘trust-worthy’?” and “What will truly help them and serve their best interests?”

Gates and Buffett: Re-thinking inheritance

“A very rich person should leave his kids enough to do anything, but not enough to do nothing,” said Warren Buffett in a September 29, 1986 interview with Fortune. As it turns out, that Fortune article influenced a young couple who would only begin dating a year later, shaping their philosophy of child-rearing long before they had children, a friendship with Buffet, or the world’s largest private foundation in the world—in no small part thanks to Buffet. Bill Gates, sitting next to Melinda, echoed Warren’s sentiments at a TED event: “We want to strike a balance where they have the freedom to do anything, but not a lot of money showered on them so they could go out and do nothing.”

According to Business Insider, each of the Gates’ kids will inherit about $10 million of their parents’ $92.2 billion fortune—a mere drop from the Microsoft cash bucket. However, the couple supports the interests of their children in multiple other ways. For instance, they have supported their eldest daughter Jennifer on her journey to become a nationally ranked show jumper, attending competitions and funding horses and trainers, even purchasing a string of properties in Wellington, Florida—the equestrian capital of the US.

Jennifer Gates shows what having the ability to “do anything” looks like. Her dedication paid off with a national championship trophy (with a $100k purse) in 2017 and a prestigious award in 2018 from the United States Equestrian Team Foundation for sportsmanship and horsemanship. In addition to being a top-ranked equestrian athlete, Jennifer is a full-time Stanford student. She’s studying Human Biology and focusing on issues surrounding the well-being of children. She has volunteered for a teen crisis clinic, traveled to rural Tanzania with her mother to study the barriers to education for girls, and is an ambassador for three organizations that advocate for equine welfare. She plans to proceed to medical school after graduating and perhaps a school break for more show jumping. And she even fixes her own computer when troubles arise because, as she confessed in an interview with HorseNetwork.com, her dad is “not all that great at it.”

In a “This Morning” TV interview and a TED conference event, Bill and Melinda Gates both affirm that their kids are completely on board with their parents’ charitable commitments to fight poverty and improve health and education outcomes for children worldwide. The conversations reveal that it is this mission—not mere money—that Bill and Melinda see as the primary legacy they are passing down to their children—and inspiring other business leaders to share. They have given away $18 billion through their foundation, according to CNBC, and they’ve helped Buffet give away $46 billion. And now hundreds of CEOs and founders have now accepted Buffet and the Gates’ challenge to take The Giving Pledge to donate more than half of their assets.

Carnegie’s Gospel of Wealth

Long before Gates and Buffett, steel tycoon Andrew Carnegie gave away an estimated $350 million during his lifetime for the public good. The equivalent of about $5 billion in today’s dollars, his gifts funded education, scientific research, peaces causes, and the establishment of over 2500 local libraries.

“The man who dies rich, dies disgraced,” wrote Carnegie in an essay titled “The Gospel of Wealth,” expressing his conviction that the wealthy had an obligation to give back to society. But while Carnegie gave much to society, he gave precious little to his descendants. He left his wife (per one of the first prenuptial agreements ever written) and children only small trusts and modest properties. He did not even leave his family a stake in the company he helped build.

So what do Carnegie’s descendents think about this? A 2014 Forbes article, “The Gilded Age Family That Gave It All Away,” sheds some insight. Linda Thorell Hills, one of Andrew Carnegie’s great granddaughters, said her family has “lived conservatively and privately,” noting that it is easier to blend in since they descend from his daughter and don’t carry the Carnegie last name. Still, she said they’re emboldened by his legacy.

“Making one’s own way in life is a healthy way to be,” says Linda. “Our family has been very much raised with the philosophy that our own individual lives are what we make of them.”

Being a Rockefeller

Families such as the Rockefellers have taken a different route than Buffett, Gates and Carnegie. The Rockefellers have passed down great financial wealth, teaching subsequent generations to steward it with great care and generosity. Writes Eileen Rockefeller, great-granddaughter of John D. Rockefeller in Being a Rockefeller, Becoming Myself:

“We are free to spend our money as we wish, but we have inherited the values passed down from my great-grandfather: to give no less than a third of our income away annually, and to give our time to causes such as social justice, the arts, and land conservation. We have promoted innovations in medicine, education, and science. Philanthropy is the glue that has bound us through seven generations.”

In spite of different approaches, there is a common thread among these families: they never saw money as the only or even primary gift they were leaving their children. They all invested in what was most important to them—including their children. They modeled the ability to live and work for something larger than dollars alone. And they made sure that their children would have opportunities to succeed and make their own contributions, not enticements to become unproductive spenders.

Inheritances that help vs. hurt

In contrast to the famous families profiled above, history is also filled with stories of heirs of great wealth who have descended into ruin, unable to maintain or manage the money, much less their own lives. Perhaps most famously, Barbara Hutton, an heiress to the Woolworth fortune, blew nearly a billion dollars (with no small help from her seven husbands and her addiction to drugs and alcohol). She showered gifts on friends and even strangers until she found herself selling personal items to make ends meet. She died at age 66 in a New York hotel that had become her home with only $3500 remaining of her fortune, according to InvestorPlace.com.

But Hutton’s spendthrift behavior wasn’t merely a financial failure; it was a symptom of the family’s failures. Her ambitious father was both a workaholic and a philanderer, and her mother died (suspected suicide) when Barbara was young. With no parents present in her life, Barbara was shuffled around between family members or cared for by a governess. Meanwhile, she was ridiculed and hated by the public even as a child, seen as a spoiled debutante. Failed by parents, guardians and role models, Hutton’s life became a fruitless spending spree—a desperate attempt to buy lasting love, approval and comfort elsewhere.

Happily, most inheritances have better endings! As a giver of an inheritance, how can you help to insure that money is used to improve the lives of your loved ones, and not foster dependence or entitlement?

Regardless of the size of monetary gift passed down to descendants, the key to a successful inheritance appears to be this: founders must pass on a legacy of more than just money. When money is passed generationally devoid of mission, purpose, values and love—without the human, social, intellectual and spiritual capital that shaped the founders’ legacy—it can lead to poor results. Money won’t “fix” character flaws and it only feeds addictions. If a receiver is unprepared, money that arrives in large, sudden or unrestricted amounts can sabotage independence.

However, when money is passed down with know-how, guidance, wisdom, purpose and values to well-nurtured recipients—heirs can become the best possible stewards of wealth. Rather than spending and disposing of capital, wise heirs use capital to invest in their future and support the values of the family. For example, money might be used to help an heir start a business or obtain an education, formal or otherwise. It might be used to fund a foundation, provide the down payment for a first home, or provide a mentor to help the heir towards a worthy goal. It would not be used to make grand purchases or subsidize lifestyle.

The successful giver knows it is better to give an orchard than a harvest. Likewise, the successful heir recognizes an inheritance is a seed to plant and an orchard to maintain, not a harvest to consume. An inheritance provides the seeds and the tools to produce a harvest, but seeds can only thrive in fertile soil.

Leaving a legacy of more than money

Families that pass wealth successfully don’t pass “only” money to their heirs, because they don’t see money itself as the greatest gift they can leave their children. On the contrary, they recognize that “too much of a good thing” might end up being a not-so-good thing. They model the ability to live and work for a purpose larger than dollars alone. And they make sure that their children will have opportunities to succeed in the game of life, not enticements to watch from the sidelines.

TED conference organizer Chris Anderson asked Bill Gates if he planned to make his children all billionaires, noting that had plenty of money to do so, despite his vast contributions to the foundation.

“Nope,” answered Gates. “They need to have a sense that their own work is meaningful and important.”

Gates sees his children’s potential too valuable an asset to spoil with a billion dollars. And this is the essence of generational wealth: the opportunity to help the next generation succeed by giving descendants the tools, knowledge, education, love, encouragement, and yes—the financial resources to thrive. It’s helping heirs succeed on their own terms—with an extra helping of assistance and resources.

There are many ways to help cultivate the proper mindset and readiness so that an inheritance lands on fertile soil. It starts by raising responsible children, nipping entitlement in the bud, and encouraging productivity. It continues with open communication about money, and teaching children how to participate in family finances and manage their own. And generational wealth must be built on a foundation of long-term thinking.

There are also structures and practices that can be helpful, such as a family mission statement, family retreats, a family bank, trusts, and the formation of a family council that oversees the family bank. Life insurance lends itself well to family banking because it can be used for borrowing against as well as for giving. Structures that allows family members to borrow against and repay capital can be more helpful than outright gifts, as it allows heirs to “do anything… but not do nothing.”

To find out more about creating and keeping multi-generational wealth, sign up below to receive a complimentary copy of The Family Banking Book when it is released:

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