It’s one of the great cautionary tales in financial history. For accountants and wealth managers, it is equal parts baffling and unsurprising. How one of the United States’ greatest industrial families squandered an immense fortune estimated at around $140 billion in today’s dollars (but potentially much more) is difficult to fathom. But the Vanderbilt story reminds us that if building multi-generational wealth is an extraordinary challenge, retaining and growing it is an equally daunting task that only a relative handful of families manage successfully.
Cornelius “The Commodore” Vanderbilt was among the wealthiest Americans in history, yet his seemingly impenetrable fortress of capital was sacked within a few generations. The story goes that by the time the Vanderbilt family organized a reunion in the 1970s, there wasn’t a millionaire among the descendants who attended. Even if the story is exaggerated, the fact that one of America’s great fortunes had been pilfered away leaving little for subsequent generations is shocking to most of us. While this may seem like an unbelievable turn of events, the Vanderbilts are not an anomaly.
Studies of multi-generational wealth show that about 70 per cent of families see their fortunes dissipate by the second generation. That figure reaches almost 90 per cent of families by the third. In the Vanderbilts’ case, a range of factors—keeping up with the ultra-wealthy Joneses (including owning and maintaining several lavish mansions), divorce, alcoholism gambling addictions, internal conflicts, the inevitable expansion of the family tree causing wealth dilution and, generally, reckless spending tied to the notion that the family fortune could never possibly be spent down (spoiler alert: it could)—contributed to their steadily declining net worth.
Is it possible for high net-worth families to build a legacy of wealth that lasts—even grows—across decades? It is. But making wealth multi-generational involves more than effective tax, estate and financial planning (although, as we’ll see, those are key components). It requires a comprehensive approach that ties together emotional awareness and financial education to prepare heirs to manage, sustain and, hopefully, grow their inheritance. By combining strategic foresight with a commitment to that level of attention to detail, families can build financial capital that enriches and fuels the aspirations of future generations. But it isn’t easy.
Before we explore several wealth-preservation strategies, let’s look at some of the reasons why fortunes often evaporate. These impact all families categorized as high net-worth, no matter their degree of wealth:
Financial illiteracy—Managing vast sums of money is a challenge for seasoned portfolio managers and wider financial teams. Now imagine inheriting millions of dollars—possibly at a young age and with little financial expertise—without the acumen to effectively navigate everything from tax and estate law to cash flow management. A lack of basic budgeting and investment knowledge, or a sub-par understanding of the intricacies of managing various assets—which could include one or more businesses—can impede an heir’s ability to responsibly preserve and grow their wealth. Add in patterns of reckless spending and it’s easy to see how wealth can be squandered.
Ineffective estate and tax planning—Without proactive planning, a significant portion of a family’s wealth could flow straight to the Canada Revenue Agency or provincial tax authorities in the form of taxes and probate fees when an estate is settled. In fact, families often disregard the impact of deemed disposition tax liabilities at death, which can force the liquidation of assets such as private businesses or real estate such as a family cottage, simply to cover a foreseeable tax bill.
Family conflict—A family governance structure and frank discussions about parents’ estate plans and wealth can help defuse predictable disagreements. The trouble is that these conversations don’t always happen. Even when vast sums of capital are involved, heirs can squabble over everything from which one inherits prized art or heirlooms to who gets to manage the family business. Establishing a strict family decision-making protocol or dispute resolution mechanism (perhaps mediated by a third party trusted advisor such as a lawyer or accountant) can help mitigate the risk of legal disputes and wealth-destroying conflicts.
Keeping too many eggs in one basket—It’s not uncommon for high net-worth families to build wealth through a lucrative asset class such as real estate, or a thriving business. But a lack of financial diversification can derail long-term wealth accumulation and preservation plans. Unexpected liquidity events, real estate depreciation, a market downturn or business failure are examples of shocks that can make it risky to be over-invested in a single asset.
Absence of a clear vision and values—Wealth can become meaningless if a family becomes detached from their shared values or lacks a sense of financial purpose. Some heirs may prioritize philanthropy, for example, while others may value consumption or entrepreneurial risk-taking. That lack of coherent direction and family unity can result in vastly different spending priorities that whittles down a fortune over time.
Next, we’ll discuss several practical tactics to make your goal of multi-generational wealth preservation a reality.
Tony Sokic, Managing Partner
For assistance with your high net-worth tax, accounting and strategic financial needs, contact us today.
