There are many reasons why family fortunes disappear over time. According to a study by the Williams Group Wealth consultancy 90% of wealth is lost within three generations. We discuss the main reasons family fortunes disappear and use the Rockefeller family as a case study.
Reasons Family Fortunes Disappear
Family Planning is Ignored
Once the ‘wealth creators’ pass on and money is passed down to children and grandchildren this might be spent frivolously as decisionmakers change hands. As the children and grandchildren might not have worked hard to obtain the wealth they might be more likely to spend it. There are of course exceptions to this and many children go on to take over the family business successfully.
The Family Grows Bigger
Over time the family continues to grow and grow and money is consistently spread among children and grandchildren the wealth of the family is spread much more thinly. The Rothschild family began to build wealth in the 18th century and there would be significantly more heirs than the Rockefeller family as John D. Rockefeller only died in 1937 for example.
Political or Economic Turmoil
Political or economic turmoil could be the reason for some family fortunes disappearing, think of the transfer of wealth in Russia in the 1920’s when communism took hold for example. Assets were taken from the ruling capital class and spread amongst the poor, hyperinflation also destroyed the value of many of these assets.
Divisions within a family could lead to conflict which results in suffering both financial and emotional losses. Divorce is another significant way to reduce family fortunes, it seems Jeff Bezos lost close to $40 billion in a divorce settlement, ouch.
Entrepreneurial Spirit isn’t Passed On
It is probably much harder to develop an entrepreneurial spirit if you grow up in a rich family, after all 90% of billionaires are self made. The drive of achieving success tends to be stronger for someone who is poor than someone who is living comfortably. This is of course generalising again and there will be some children who go on to become more successful than their already successful parents.
Taxes and Inflation
Inheritance tax, capital gains tax, income tax, dividend tax and inflation. These can all eat into a family’s fortune over time if proper planning is not in place. By investing wisely and having a return that outpaces inflation will be the first step to preserving a family’s wealth over time. Inheritance tax will also be a big blow on a family’s wealth when it’s passed down generation to generation if the money hasn’t been invested wisely.
Many wealthy people give a significant portion of their wealth to charity either whilst their still alive or when they pass away.
What About Todays Super Wealthy?
The Giving Pledge was a campaign first announced by Bill Gates and Warren Buffett to encourage billionaires to give away a substantial portion of their wealth to philanthropic causes. The pledges currently total hundreds of billions of dollars and are continuing to grow rapidly. The members plan to shed at least half their wealth to the cause (which is becoming challenging believe it or not as their fortunes are growing so fast). The wealth of some of the billionaire pledges has increased 95% since the initiative began in 2010. Much of Buffett and Gates’s wealth will also go to the Bill and Melinda Gates foundation. Bezos also launched a $2 billion philanthropic venture and pledged $10 billion to address climate change. It seems like after some of todays billionaires pass on their family fortunes will disappear substantially and whilst their children will receive modest sums to live comfortably the vast majority of the family’s wealth will disappear before it even reaches the next generation.
Using the Rockefeller Family as a Case Study
John D. Rockefeller was believed to be the richest man to ever live and he was the worlds first billionaire. His fortune was worth 3% of the entire US economies GDP, adjusted for inflation this would come to around $450 billion. If there was a family that was going to set up many future generations surely it would be this one. Rockefeller had five children although two died before his death as he lived to 100 years old so his wealth was only divided between 3 children right? Well not exactly, there was significant charitable contributions written into Rockefellers will. Adjusted for inflation the children were still left a fortune that would make them in the top 100 richest people today. If the children invested their fortune into the S&P 500 the year of their fathers death they would have increased their wealth by 1000% 23 years later adjusted for inflation. If Rockefellers fortune was invested in broad market index funds in the year of his death in 1937 it would be worth over $4 trillion today. So where did it all go wrong?
There are 25 beneficiaries today so the wealth has been divided up significantly. Much of the wealth has also been given away, each of Rockefellers children gave away close to half of their fortunes. Rockefellers grandchildren’s wealth was believed to be around $3 billion which is a significant sum but it has only managed to keep up with inflation. Taxes and divorce settlements have also cut down the family fortune, the family’s wealth is so diversified and split among different people it’s hard to keep track of how much there actually is. If you take someone like Bill Gates you can roughly work out how much he’s worth as most of his wealth is in a public company. So I suppose we don’t actually know what the family is currently worth.
It’s not really surprising that a family’s wealth almost disappears entirely within 3 generations. This is still quite a considerable period of time and when the money is spread between more and more people each generations chances of disputes and divorces increase. The entrepreneurial spirit the successful person in the family had might also not be passed down to each generation and instead of investing the wealth they consume it. There are of course many wealthy family’s that donate significant sums to philanthropy as well.
The views expressed in this post are the authors and should not be construed as financial advice
You can sign up to Freetrade on mobile devices using our affiliate code ‘david/caf1c45c‘ and receive a free share worth between £3 and £200.
If you want to invest in Cryptocurrency you can sign up to Crypto.com here and receive a 25 dollar bonus.