The challenge of generational wealth
“Shirtsleeves to shirtsleeves in three generations.” This age-old proverb exists in various forms across cultures, highlighting a universal truth: building wealth is difficult, but preserving it across generations is even harder. Many studies show that 70% of wealthy families lose their fortune by the second generation, and 90% by the third.
Why? The answer often lies not in poor investment strategies but in heirs who haven’t developed the financial responsibility and acumen necessary to manage their inheritance wisely. Teaching your heirs about money management isn’t just about preserving wealth—it’s about empowering them to live purposeful, productive lives regardless of their financial circumstances.
Now, we are not financial planners, we’re succession lawyers, so please don’t take this as financial advice, it’s lessons learnt from decades of working with Western Australian families when it comes to helping raise the bar on early understanding of how money works, how hard it is to earn, and the smart ways to help protect and grow inherited wealth.
Make sure financial literacy starts early
Financial education, even in its simplest form, can be the greatest gift you can give.
Primary school kids: Introduce basic concepts using allowances and savings jars. Help children distinguish between needs and wants, and demonstrate delayed gratification through saving for special purchases.
High school aged kids: Open a bank account, introduce budgeting tools, and expand financial vocabulary. Discuss family financial decisions when appropriate and explain the reasoning behind them.
Ages 17-21: Cover more complex topics like compound interest, credit scores, student loans, and retirement accounts. Encourage part-time work to foster an appreciation for earning money – there are so many apps to help financial literacy to explore that gamify great savings habits.
Ages 22+: Include adult heirs in family financial discussions, introduce them to your financial advisors, and gradually increase their responsibilities regarding family assets.
Model financial responsibility
Children learn by example. Demonstrate healthy financial habits by:
- Having regular, open conversations about money without making it taboo
- Involving family members in household budgeting discussions
- Acknowledging and learning from your own financial mistakes
- Celebrating financial milestones and wise decisions
Remember that your actions speak louder than words. If you preach frugality but practice extravagance, your heirs will notice the disconnect.
Create hands on learning opportunities
Theoretical knowledge only goes so far. Provide practical experiences that build real-world skills:
Family investment club: Set aside a small portion of family funds for heirs to manage collectively. Hold regular meetings to discuss investment choices, performance, and lessons learned.
Philanthropic fund: Establish a charitable fund that family members manage together, researching causes, evaluating organizations, and making grant decisions.
Business participation: If you own a family business, create meaningful roles that allow heirs to learn operations, management, and strategic planning.
Financial simulators: For younger heirs, use financial simulation games that teach concepts like budgeting, investing, and financial planning in an engaging format.
Communicate values, not just numbers
Wealth transfer fails when families focus solely on financial assets while neglecting the values and purpose behind them. Successful intergenerational planning requires:
- Clearly articulating your family’s core values and how they relate to wealth
- Sharing your family’s history, including struggles and triumphs
- Discussing the purpose of your wealth and what you hope it will accomplish
- Explaining the responsibilities that come with financial privilege
These conversations help heirs understand that wealth is a tool for creating impact, not simply a means for personal consumption.
Utilise financial and legal planning tools
Strategic use of financial and legal structures can reinforce financial responsibility:
Trusts with incentive provisions: Structure trusts to release funds when heirs reach certain milestones, such as educational achievements or income thresholds.
Family constitutions: Develop a written document outlining the family’s approach to wealth, governance structure, and expectations for family members.
Financial literacy requirements: Some families require heirs to complete financial education courses before receiving inheritance.
Financial mentorship: Pair heirs with trusted financial advisors who can provide guidance independent from parental influence.
Prepare heirs for upcoming wealth
With over $5 trillion set to pass from one generation to the next in Australia alone over the coming two decades, wealth is inevitable for many lucky new generations. Although incredibly fortunate and positive, a large inheritance can be overwhelming without proper preparation. Help heirs develop the emotional and practical skills to handle sudden wealth by:
- Discussing the potential psychological impact of significant wealth
- Encouraging the development of a strong identity separate from money
- Teaching strategies for responding to requests for loans or gifts
- Practicing planning for different financial situations
- Consider the age of your beneficiaries – the new 21 is now more like 30.
- Protect your gift to them – your succession lawyer can help protect inheritance from future loss such as a marriage breakdown of one of your beneficiaries, bankruptcy or financial loss given addiction issues of many kinds.
The gift of financial independence
Perhaps the greatest expression of financial responsibility is the ability to create and maintain one’s own economic security. Encourage heirs to build careers and financial lives independent of family wealth by:
- Celebrating entrepreneurship and professional achievements
- Avoiding bailouts that prevent learning from financial mistakes
- Supporting education and skills development
- Acknowledging that financial success looks different for each person
Shaping financially wise heirs
Teaching financial responsibility to your heirs requires initiative, patience, and consistent effort over time. By combining practical education with values-based discussions and appropriate financial structures, you can equip the next generation to be good stewards of your legacy.
Remember that the goal isn’t to control your heirs’ financial decisions forever, but to develop their capacity for wise financial judgment. The most successful wealth transfers occur when heirs possess not just financial knowledge, but also the confidence, wisdom, and perspective to use wealth as a positive force in their lives and communities.
By investing time in your heirs’ financial education today, you’re protecting your family’s financial future for generations to come. To ensure your estate plan aligns with these goals, speak with one of our experienced estate planning lawyers who can help you structure your legacy for long-term success.
