Will Your Farm Family Beneficiaries Beat the '3-Gen' Odds?

Tips for helping your farm family survive the '3-generation' rule and avoid losing their legacy.

Published on: Jul 26, 2013

Two-thirds of baby boomers (farmers included) will inherit a total $7.6 trillion in their lifetimes, according to Boston College Center for Retirement Research. That's the good news. The bad news is they'll likely lose 70% of that legacy – and not because of taxes.

What's more, by the end of their children's lives, nine of 10 family fortunes will be gone, forewarns John Hartog, partner in Hartog & Baer Trust and Estate Law. "The third-generation rule is so true that it's enshrined in the Chinese proverb: 'Wealth never survives three generations,' " he adds.

Beating the 3-gen odds
Most of the reasons that it happens are preventable. Here are three tips offered by Hartog; CPA Jim Kohles, chairman of RINA accountancy corporation; and wealth management expert Haitham "Hutch" Ashoo, CEO of Pillar Wealth Management, all based in Walnut Creek, Calif.

Will Your Farm Family Beneficiaries Beat the 3-Gen Odds?
Will Your Farm Family Beneficiaries Beat the '3-Gen' Odds?
All three say the solutions involve honest conversations – the ones families often avoid because they can be painful. And, it begins with passing along family values and teaching young children how to manage money.

•"Give them some money now and see how they handle it." Many first-generation wealth-builders work so hard to build the family fortune, They teach their children social responsibility, to take care of their health and to drive safely. "But they don't teach them financial responsibility," says Hartog. "They think they'll get it by osmosis."

If your children are now middle-aged, it's probably too late for that. But as a first-generation wealth-builder, you can see what your offspring will do with a sudden windfall of millions by giving them a substantial sum early – without telling them why.
"I had a client who gave both children $500,000," recalls Hartog. "After 18 months, one child had blown through the money. The other turned it into $750,000." (Child A got his inheritance in a restricted-access trust.)

•"Be willing to relinquish some control." Whether it's preparing one or more of their children to take over your family business, or diverting some pre-inheritance wealth to them, the first generation often errs by retaining too much control, says Kohles, a business succession consultant.

"We don't give our successor the outright freedom to fail," he adds. "If they don't fail, they don't learn, so they're not prepared to step up when the time comes."

In the family business, future successors need to be able to make some decisions that don't require approval of the first generation. Parents need to plan for giving away some of their wealth before they die. It helps avoid triggering an estate tax, and helps them learn to manage money.

•"Give your beneficiaries the opportunity to build wealth, and hold family wealth meetings" The first generation works and sacrifices to make the family fortune – so often the second generation doesn't have to. The third generation is even further removed from that experience, says wealth manager Ashoo.

"The best way they're going to be able to help preserve the wealth is if they understand what goes into creating it and managing it – not only the work, but the values and the risks," he elaborates.

Aschoo also advises first-gen owners to allocate seed money to the second generation for business, real estate or other potentially profitable venture. Holding ongoing family wealth meetings with your advisors is also critical to educating beneficiaries, and passing along family and wealth values. It also builds trust between the family and the primary advisors.