That wealthy parents beget wealthy heirs is well researched and proven. In fact, parents in the top quintile of wealth and the bottom quintile are very likely to have children of the same wealth category through their adult years. The top fifth has one year’s earnings of net worth; the bottom fifth has but six weeks of net worth. Curiously, the gap is the same in Sweden – the land of perceived equality – and the USA – the land of perceived inequality.
But, until now, there hasn’t been a study explaining exactly why that’s true[i]. There are theories that the next generation inherits a leg up and those that believe the next generation learns certain approaches to money.
What do you think?
Kids of parents of wealth earn more in their lifetime.
The next generation creates wealth by investing in homes – as their parents did.
Kids from wealth learn to do riskier and higher return investing – just like their parents do.
The next generation benefits from inheritance bequests.
The next generation benefits from lifetime financial gifts from their parents.
The next generation follows the lead of their parents with better education.
The heirs learn to save more money from their parents.
1, 2, 3, and 4 are true in that order of influence. 5, 6, and 7 have no influence on children’s wealth accumulation. Purchasing homes sooner and investing in high return ways are the two most discriminating factors of heirs of wealth. In conclusion, what’s learned at home about how to manage money is more important than the passing of wealth from one generation to the next. (Unfortunately the same holds true for the poorest of the next generation.) Parental example is what really matters.
[i] Now there is, by researchers Peter Lundgren of Stockholm School, Thomas Jansson of Sveriges Riksbank, and Todd Sani of the Wharton School.
A friend asked about the impact of wealth on the children of families owning significant assets. What’s the secret, he asked, to helping such children achieve reasonably well-adjusted adulthood? Indeed, I was reminded of one client who shared his fear that making his kids rich would make them “poor” human beings.
Here’s the answer I offered — recognizing the complexity of the challenge: Parent’s must help their children understand that wealth — while it may provide ease — does not provide easy answers. Only through work — meaning only through the investment of one’s self — does life gain substance and meaning. Work does not necessarily mean “working for pay.” It means working for achievement and it means working at relationships. If one doesn’t work at fulfillment through achievement and relationships, then things don’t work — and life doesn’t work very well either.
If you are wealthy and have children, you probably worry that your money will negatively impact the development and motivation of your children. Put bluntly, you don’t want your kids to become lazy because they assume that your money will soon become their money. Telling them prematurely may increase the chances of this happening. Keeping information from them may cause resentment and mistrust. When to tell them, and how – these are the tough questions.
Consider Steve, the 28 year-old son of a wealthy business owner, who did not know that his family was wealthy until he reached his mid-twenties. His dad had created a significant amount of wealth in his life, but maintained an austere lifestyle. Steve thought his family was just like all the others in his affluent southern California neighborhood.
I asked Steve how he had learned of his family’s financial status. He said, “I was a 25 year old graduate student in Oregon. My mom came to visit me at the apartment I shared with three other students. Mom didn’t stay long – it wasn’t a nice apartment. As she left she said, ‘I’m going home and talking to dad, you’re getting a different place.’ I said ‘I can’t afford anything better mom; I’m a struggling graduate student.’ She said, ‘You can afford it, we’ll call you.'”
Steve continued, “As you can imagine, that comment intrigued me. I got a call from my dad that night. Dad doesn’t say much, so the conversation went something like this.
‘Steve, it’s dad.’
‘Mom says your apartment is a dump. We want you to buy a house, and yes you can afford it. You do have some money and it’s time you know about it.’
‘How much money dad?’
‘Liquid?’ About $18 million.’
‘Have a nice day, son, talk to you later.’ And then he hung up the phone.”
I asked Steve how this realization that he was a multi-millionaire affected him. His answer surprised me. He said, ‘I sat on my bed in a sort of stunned silence. The first feeling was shock. The second feeling was anger.”
“Anger?” I asked, a bit shocked myself.
“Yes,” Steve answered. “I was disappointed that they waited until I was 25 to tell me. I had done a lot of things by then, earned money to travel around the world, taught English in Asia, volunteered in charities. I just wondered why they felt like that information should be kept secret from me. Why hadn’t they trusted me before that time?”
Steve could have been made aware of his wealth earlier in his life. His parents came to realize this as we worked together. He had accomplished much. He had gained some amount of wisdom. Why hadn’t they told him sooner? I posed this question to them one morning.
In short, they waited out of fear. First, they were afraid that the knowledge would harm him. Second, they feared the discomfort of the actual meeting. They are often unsettled by these types of discussions and put them off for as long as they can.
In our discussion, I added a third reason. In my opinion, they were unaware of the level of maturity Steve had reached while working abroad. Had they established more consistent communication patterns with him, and known what he was spending his time doing, his parents would have made a better decision about the timing of their announcement. By waiting longer than needed, they damaged the trust between them.
What’s the right age to tell them? It depends on their maturity. A better question is – what’s the right time to tell them? Answer: When they are prepared to handle the financial truth. And the only way to know that they are ready is to stay close to them, learn about their lives, what they are accomplishing, how they are spending their time. And then, dear parent, you must make a judgment about their maturity.
Certainly Steve’s case could have ended up much worse. Though Steve was disappointed, and his relationship with his parents damaged in the short term, everything has worked out just fine. Too many similar situations end with long-term damage to relationships and development.
By the way, you may be interested to know how Steve’s money changed him. I asked him how he celebrated his new found wealth. Did he buy a mansion? No, he rented an apartment on his own. Did he drop out of school? No, he completed his degree, a master’s in teaching. Did he buy a flashy new sports car? No, he bought a mountain bike. “But not an ordinary one,” Steve continued. “This one cost over a thousand bucks.”