Heard the adage, “shirtsleeves to shirtsleeves in three generations?” That saying is not just a cliche; it’s a cautionary tale.
It describes how family wealth, built through hard work and sacrifice, often disappears by the third generation. The first generation builds it, the second maintains it, and the third, lacking the same perspective or discipline, risks losing it.
A 20-year study that looked at thousands of affluent families confirmed this. It found that 70% of family fortunes vanish by the second generation. An astounding 90% of family wealth is gone by the third generation. However, you can break that cycle with the right mindset and approach.
Here, we’ll share a few strategies that can help your family business preserve wealth across generations.
#1 Nurture the Next Generation to Lead
One of the biggest reasons family businesses falter after the founder steps down isn’t lack of money or opportunity but lack of preparation. The next generation may inherit the company, but if they are not equipped to lead, the future becomes uncertain.
Don’t just pass the baton. Encourage the next generation to learn the ropes early. Invest in education, exposure, and experience for the younger generation long before they take over.
Match potential successors with strong mentors, such as a senior executive or an external advisor. Let them spend summers working in the business, not just in the cushy office jobs but on the ground, learning what makes things tick.
Don’t hand over control suddenly. Gradually increase their decision-making authority. The transition should be phased over several years.
If a family member doesn’t want to join the business, don’t force them. The North America Family Business Report 2023 reveals that 22% of people in the next generation are not willing to take over the reins of the family business. Forcing a reluctant successor often creates resentment and poor performance.
#2 Diversify Beyond the Core Business
It is risky to have your family’s entire financial identity tied to one company. Diversification is necessary to spread the risk.
Strategic diversification means more than just buying index funds. You might acquire a complementary business, invest in innovation, or explore expanding into new markets.
Alternative investments are also a great option. Richard P. Slaughter Associates explains alternative investments as a category of assets that fall outside the traditional investment classes of stocks, bonds, and cash. These include private equity, hedge funds, real estate, and commodities.
Research shows that over two-thirds of family businesses intend to increase their allocation to private equity investments and funds. And about 30% are focused on increasing their exposure to private debt.
Don’t dive headfirst into these investments; thorough due diligence is important.
Working with wealth management experts would be wise, especially if you’re from vibrant business hubs like Austin. It’s one of the nation’s fastest-growing regions, known for its booming tech sector, entrepreneurial spirit, and diverse economy.
In such a competitive and opportunity-rich market, consider partnering with Austin-based wealth management experts. They can help you identify lucrative diversification opportunities that align with your values and long-term goals.
#3 Plan for Taxes and Legal Transitions
The federal tax system can severely erode wealth if you are not prepared. Federal estate tax rates can climb as high as 40%. Without careful planning, estate taxes, ownership disputes, and unclear succession structures can quickly erode wealth.
The high estate tax exemptions in the US are scheduled to sunset in 2026. This reduction could result in huge tax bills. You should use the current high exemption amounts now. Gifting during your lifetime locks in these benefits before they potentially shrink.
Simple tools like the annual gift exclusion are powerful. For 2025, you can give $19,000 to any person tax-free. This transfers wealth efficiently over time.
Trusts also provide clarity, reduce taxes, and prevent conflicts. One powerful tool is the Dynasty Trust. This is an irrevocable trust designed to pass wealth down for multiple generations.
If you structure it properly and use the GST exemption, the assets avoid federal estate and GST taxes at the death of each successive generation. This allows the wealth to compound tax-free for potentially centuries.
Another advanced planning tool is the Intentionally Defective Grantor Trust. It removes assets from your estate (for estate tax exclusion) while simultaneously ensuring you, the grantor, continue to pay the income tax generated by those assets.
Charting the Course for Multi-Generational Prosperity
The goal of lasting wealth is achievable, but it requires intentional action.
History shows that waiting to act or avoiding hard conversations is the surest path to losing your legacy. Don’t let that happen. Act now because the decisions you make today will determine how strong your family’s financial foundation remains tomorrow.
So, follow these tips and you can transform your family from an asset holder into an enduring, multi-generational enterprise.
