Discover how to effectively manage and preserve wealth across generations, ensuring that your family's financial legacy endures beyond the challenges of the modern economy. File photo.
By: Thomas Berry
A study by The Williams Group, which tracked 3 200 families over two decades, has found that 70% of wealthy families lose their fortunes by the second generation, and 90% by the third. Interestingly, this trend transcends geography and culture, as reflected in the Chinese proverb: “Wealth does not last beyond three generations”, which echoes the American saying “Shirtsleeves to shirtsleeves in three generations”.
This is particularly relevant considering that the biggest global transfer of wealth is currently underway. In the coming years, baby boomers are set to pass down more than $68 trillion – that’s more than double the size of the whole US economy. This, however, is not only an American – or developed market – phenomenon, but a global one, affecting wealthy families around the world, including in South Africa.
The economic impact of any intergenerational wealth transfer depends largely on how it is managed. Some beneficiaries may reinvest in commerce, real estate, or education, but there is always a risk that others may opt to pay off debt or fund early retirements rather than fuelling economic growth. Governments, too, are likely to increase scrutiny around inheritance tax, adding another layer of complexity to generational wealth transfers.
The current risks facing Great Wealth Transfer beneficiaries
If proper succession planning isn’t in place, disputes, lawsuits, or reckless spending can quickly erode fortunes. Many families unfortunately fail to implement the necessary structures to protect their wealth over time.
Sound financial education is one of the most critical factors in effective intergenerational wealth transfer. A sudden influx of wealth, coupled with a lack of financial literacy, can lead to poor investment decisions, overspending, and, in extreme cases, complete financial ruin. For instance, a recent baseline survey by the FSCA has shown that only 51% of South African adults are financially literate. Without guidance and education, heirs risk making decisions that diminish their inheritance.
Furthermore, it is often assumed that wealthy families openly discuss financial matters with their children, but studies suggest otherwise. A reluctance to discuss finances can leave heirs unprepared to manage their wealth effectively, making them vulnerable to making poor financial choices.
Additionally, the modern economy presents new challenges. Inflation, economic downturns, and geopolitical instability could erode wealth if it is not carefully protected and invested. As wealth becomes increasingly tied to financial markets, a thorough and well-thought-out financial plan should be put in place to avoid client fortunes diminishing at a faster rate than anticipated.
The solution: long-term planning and financial education
There is a well-known saying by Warren Buffet that aptly illustrates why long-term wealth planning is essential: “Someone’s sitting in the shade today because someone planted a tree a long time ago”. We see time and time again that generational wealth is not self-sustaining; it requires active management, strategic planning, and, above all, patience.
For younger generations, growing up in a digital world provides an opportunity to enhance financial literacy and investment strategies through online platforms, digital financial tools, and educational courses on personal finance. By leveraging technology, Gen Z and millennial heirs can gain a better understanding of wealth management and ensure their inheritances last.
From a macroeconomic perspective, the ongoing wealth transfer could drive significant economic growth – but only if it is managed effectively. True generational wealth is not just about passing down assets; it’s about passing down the knowledge and discipline needed to sustain them.
* Berry is the head of sales at PSG Wealth.
PERSONAL FINANCE