Statistics reveal that 70% of rich households lose their wealth by the second technology, and 90% have exhausted it by the third. For households who’ve spent many years constructing profitable companies, accumulating actual property portfolios, or producing substantial revenue, this signifies a devastating erosion of wealth legacy.

Nevertheless, based on Steven Bowles, CLU®, founding father of Catalyst Advisory, this final result could be averted. After spending seven years working inside a household workplace advisory group that serves ultra-high-net-worth households, Steven has seen firsthand what distinguishes households who create lasting legacies from these whose wealth dissipates inside a technology or lower than two.

“Wealth destruction throughout generations is the results of particular, preventable errors,” he explains. “The households who succeed long-term perceive that defending wealth requires as a lot intentionality and technique as constructing it within the first place.”

Understanding the Two Major Threats

Steven identifies two basic forces that destroy household wealth: erosion and division. 

Erosion

Erosion primarily happens via taxation. Below present legislation, estates valued above roughly $13.99 million for people or $27.98 million for married {couples} ($15 million /$30 million in 2026) are topic to a 40% federal property tax on quantities exceeding these thresholds. Though current legislative modifications have supplied some reduction from scheduled reductions, the tax nonetheless considerably drains household wealth.

“Whenever you take a look at stability sheets of rich households, particularly those that’ve constructed wealth via companies and actual property, you notice how shortly property taxes can devastate a household’s monetary legacy,” Steven notes. A household price $50 million may face property taxes within the hundreds of thousands. With out liquidity to pay these taxes, they’re pressured to promote belongings, typically at unfavorable phrases.”

The erosion difficulty worsens for households holding illiquid belongings. Actual property traders and enterprise house owners typically discover themselves “asset wealthy however money poor.” When property taxes are due inside 9 months of dying, households missing ample liquidity face powerful selections.

Division

Division poses the second main risk when wealth is given on to beneficiaries with out sufficient safety. As soon as belongings go straight to heirs, they grow to be vulnerable to unhealthy selections, divorces, lawsuits, and collectors.

“I’ve seen it numerous occasions,” Steven says. “A profitable first technology builds substantial wealth, then distributes it on to their youngsters. Inside a number of years, that wealth is gone. Not essentially as a result of the kids are irresponsible, however as a result of they weren’t ready for all times circumstances or enterprise failures that depleted the belongings.”

Why Conventional Approaches Fail

Many households observe the “do nothing” method. They construct wealth however don’t use formal methods to guard it. Generally they’ve a easy will, however nothing extra superior.

“Permitting a major inheritance to cross on to your youngsters with out construction creates issues,” Steven warns. “It exposes them to dangers they might not be geared up to deal with.”

Conventional property planning normally divides belongings equally amongst heirs with out contemplating household relationships, particular person expertise, or asset sorts. For instance, a enterprise making up 80% of a household’s web price may be break up amongst siblings with totally different pursuits or talents to handle it.

Maybe most significantly, many households don’t talk successfully throughout generations. Wealth creators who’re first-generation traders, typically preoccupied with creating their wealth, might overlook the significance of teaching their youngsters about managing wealth, understanding the roots of the household’s prosperity, or the core values that fueled their accomplishments.

The Lacking Ingredient: The Household Structure

Past authorized frameworks, profitable multi-generational households use one thing Steven calls a household structure. This values-driven construction guides how wealth is managed and handed on.

“A household structure isn’t a legally binding doc,” Steven explains. “It’s a press release of values, expectations, and ideas that information the household’s relationship with wealth. It solutions questions like: What can we imagine about cash? What tasks include being a beneficiary? What alternatives ought to wealth create for future generations?”

This doc works alongside trusts and authorized constructions to create a framework for wealth preservation. It’d define expectations for work ethic, schooling, or charitable giving. It may set up processes for accessing household sources or making main monetary selections.

The structure features specific power when paired with early property planning. Slightly than youngsters discovering their inheritance solely after a guardian’s passing, they be taught concerning the household’s wealth technique early on, their future roles as stewards, and their alternatives.

“The households who do that effectively aren’t elevating children who really feel entitled to wealth,” Steven notes. They’re elevating children who perceive they’ve a accountability to protect and develop what they’ve inherited, and to arrange the subsequent technology to do the identical.

Strategic Instruments for Wealth Preservation

Households can make use of a number of highly effective instruments to interrupt the three-generation curse. They need to perceive the threats and the significance of values-based planning.

Irrevocable Trusts

Irrevocable trusts are among the many simplest instruments for transferring belongings out of the taxable property whereas sustaining management over how these belongings are used for future generations. Not like revocable trusts, which stay a part of the property for tax functions, irrevocable trusts set up a authorized separation between the grantor and the belongings. When appropriately arrange, these trusts can final for a number of generations, providing advantages to heirs and shielding belongings from taxes, collectors, and poor monetary selections.

Steven continuously recommends that these trusts embrace HEMS provisions, which allow distributions for Well being, Training, Upkeep, and Assist. 

“This method gives for beneficiaries’ real wants whereas stopping them from merely liquidating the belief for poor causes,” he emphasizes.

Superior methods embrace basic associate and restricted associate constructions that allow discounted valuations throughout asset transfers. 

“You probably have non-voting shares or restricted partnership pursuits, you’ll be able to typically transfer a greenback of worth utilizing solely 60 or 70 cents of your exemption,” Steven notes. That degree of effectivity can save households hundreds of thousands in property taxes.”

These multi-generational trusts, typically known as dynasty trusts, can final for many years or centuries, relying on state legislation. As a substitute of being taxed and divided with every technology, the wealth stays protected and grows throughout the belief construction.

Life Insurance coverage as a Liquidity Answer

Life insurance coverage is a vital property liquidity instrument for households with important illiquid belongings. Steven noticed that this technique is continuously utilized in his household workplace work.

“When you personal $100 million in actual property and companies, your property will owe substantial taxes,” he explains. “With out liquidity, your loved ones is pressured to promote properties or enterprise pursuits shortly, typically beneath market worth. Life insurance coverage creates tax-free capital exactly when it’s wanted most.”

Steven continuously recommends premium finance methods for ultra-high-net-worth households, using financial institution loans to fund life insurance coverage insurance policies held in irrevocable trusts. 

“Banks will lend cash to trusts with applicable collateral,” he notes. “This enables households to create substantial dying advantages with out depleting their very own capital.”

The insurance coverage coverage is structured with excessive money values that develop over time to cowl the financial institution mortgage, leading to a fully-paid coverage that gives liquidity upon dying. In the meantime, the dying profit stays outdoors the taxable property as a result of the belief owns it.

“For an actual property investor with a $50 million portfolio, a $10-15 million life insurance coverage coverage in an irrevocable belief may be the distinction between the household conserving the properties or having to liquidate every part,” Steven says.

Correct Enterprise Structuring

Steven highlights the significance of correct entity structuring as households construct wealth via actual property and enterprise investments.

“In some unspecified time in the future, for those who’re severe about constructing wealth outdoors the normal W-2 and financial savings accounts, you could construction your self extra like a enterprise,” he advises. 

That might contain holding corporations, LLCs for varied properties, or GP/LP constructions supporting asset safety and clean wealth switch.

These constructions serve varied features. They safeguard belongings from legal responsibility, allow relations to purchase possession stakes, and permit for discounted transfers to trusts via valuation strategies.

For enterprise house owners, funded buy-sell agreements present important safety. 

I’ve seen too many companies with out correct succession plans,” Steven notes. “A sudden dying creates chaos. Companions or heirs are pressured to scramble. A correctly funded buy-sell settlement, typically utilizing life insurance coverage, ensures enterprise continuity and truthful remedy of all events.

Legacy By Design, Not Default

The three-generation curse just isn’t an unavoidable destiny. It’s the anticipated final result of neglecting the dual risks of abrasion and division, however it may be overcome via cautious planning, diligent work, and meticulous monetary structuring.

Households who efficiently switch wealth throughout generations achieve this via planning that includes authorized constructions, tax methods, asset safety, and values-based schooling. By understanding that the wealth they’ve constructed deserves the identical focus, plan, and goal throughout the switch because it did throughout the accumulation, many households have confirmed able to preserving and constructing upon it. 

“I’ve labored with households who’ve achieved this brilliantly,” Steven displays. “The wealth continues to develop, every technology has alternatives that the earlier technology created, and there’s a real sense of stewardship slightly than entitlement. That’s what multi-generational wealth appears like when it’s achieved proper.”

For households constructing wealth, the message is obvious: your planning at present determines whether or not your legacy lasts many years or disappears inside a technology. The curse is actual, but it surely’s additionally completely preventable.