Growth & Jobs | Why 90 per cent of inherited wealth is lost by the third generation

MANY WEALTHY individuals prefer not to disclose their volume of wealth to their children and grandchildren. These individuals may fear that their family members will become lazy and entitled, so instead, they keep their bank account statements under wraps.

However, failing to discuss money with children and grandchildren often does more harm than good. According to Michael Lee-Chin, chairman of the NCB Financial Group, instead of keeping wealth a secret, sharing how to make wise financial decisions will decrease the chances of wasting family money.

“It is helpful to share financial and charitable goals with the younger generations. Open and honest communication is the best first step to preserving wealth. There are numerous courses and learning materials available that families may use to teach their children and grandchildren about money,” Lee-Chin said.

Lee-Chin was speaking at ‘Next Gen Talk: Breaking the Cycle’, an enlightening discussion that provided invaluable insights into succession planning and preserving generational wealth, tailored for ‘Next Gen’ family members inheriting large family businesses.

The participants were treated to engaging conversations, industry modules and frameworks, networking opportunities, and relevant discussions.This event also sought to empower the next generation to embrace healthy financial habits through education, enhance the visibility of senior NCB leadership among current and prospective customers, and raise awareness of the wealth management options offered by the NCB Financial Group.

Today’s economy, Lee-Chin said, is quite different from the era many of the parents grew up in. Roughly a quarter of that generation believes that their children will not understand how to manage money until they are at least 40 years old.

“Approximately half of wealthy individuals over 70 tend to agree with this statement. However, there are steps that can be taken to help younger family members, including a financial road map that can be used in some families to help children and grandchildren manage their money wisely. Financial road maps may lay out details such as expectations on saving, spending, and charitable contributions. Financial road maps may also offer guidance on increasing one’s wealth,” Lee-Chin said.

It is estimated that 70 per cent of wealthy families will lose their wealth by the second generation, and 90 per cent will lose it by the third. There are a variety of reasons why this happens, including that generations are taught not to talk about money, the prior generations worry that the next generation will become lazy and entitled, and many have no clue about the value of money or how to handle it

“Most parents find it very difficult to discuss their wealth and what happens when they are gone with their children. Whatever the reasons for lack of transparency, the failure to discuss will likely end with such issues like unnecessary taxes, costly estate fees, and possible family strife. Also, by not detailing their intentions, you run the risk of eroding the value of your estate,” Lee-Chin said.

The families that do maintain their multigenerational wealth, he said, are able to do so by communicating with the next generations in a very straightforward manner. The rules they live by to do this are very simple but not always easy.

Open communication, he said, builds the trust that is the basis for sustaining your family’s wealth. “Preparing the next generation for what they can expect is critical, and you should take advantage of any teachable moments that arise. By doing this, the next generation can learn, understand, and eventually participate in decisions that can affect the family’s wealth,” Lee-Chin said.

More often than not, beneficiaries of family wealth are unable to properly manage what they have inherited because the next generation was kept out of the decision-making process. This can lead to serious dysfunction and a serious lack of understanding about how the wealth is managed.

“Even with a solid line of communication open and a proper decision-making process in place, there will still be some challenges that a family will not be able to handle on their own. Having an objective third-party point of view could be useful, freeing any discussions from emotions that family members may bring to the table,” Lee-Chin said.

Gregory Christian, director of business development at CARIMED, said as a family-owned business, they understand how important it is to carry on the legacy. “There are many pitfalls that you can avoid to make sure that our hard work will last well beyond the third generation. Along with investing wisely and developing a good estate plan, educating the next generation is a crucial element in making our business last. We continue to put the values we believe in into practice to sustain our family business,” he said.

Ramar Wint, director at Clarendon Hireage, is optimistic that with continued development, the business owned and operated by his mother will stand the test of time.

“Family ownership brings a competitive advantage in situations that demand resiliency rather than rapid growth. Family businesses, with owners close to the business, can adapt quickly to changing circumstances and balance the imperatives of navigating through the current crisis with the implications for the long-term in mind. That means working hard not only to preserve cash, but also to ensure the well-being of employees and communities,” Wint said.

Meanwhile, Matthew Francis, director at Louis Industrial, formerly Louis Industrial Garage, said the business, through innovation, has been embracing technology and diversification that will see a continuation of the company’s legacy that was started by his grandfather.

“It is critical that we understand wealth and how to create and grow wealth. It is also important to understand that having family wealth and preserving family wealth are two very different things, and the latter often requires careful and considerate planning,” Francis said.

The Next Gen Talk: Breaking the Cycle discussion on the topic Breaking the Cycle: Why 90 per cent of Inherited Wealth Is Lost By The 3rd Generation,’ was held at the NCB Wellness and Recreation Centre.

keisha.hill@gleanerjm.com