As more people in the U.S. have become very wealthy over the last decade, has concern also increased about the adverse influence of inherited wealth on child development?

Views of the affect of inherited wealth on children have never been uniformly negative. As indicated earlier, not all families and advisors have taken the position that children will suffer if they inherit “ too much ” money.
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Now, as the members of the baby boom generation and their children have started to take a greater role in shaping our cultural assumptions, we see trends and conditions that may further reinforce the view that minimizing the inheritance is not the solution, or is at best an incomplete answer:

¨    Financial Success in Perspective. The growth of wealth in the U.S. economy in the last decade has tempered the focus on pure financial success. Now more people are rich, so they are asking themselves whether they are happy. Moreover, unlike their parents and grandparents, the baby boomers and younger generations have no broadly shared personal experience with severe economic distress or sacrifice of the magnitude of the Great Depression and World War II. Vietnam’s traumatic effects on the middle and upper class boomers were more political and psychological than tangible. Financial success therefore seems to be less of a prize.

¨    The Science of Happiness.  Happiness has become a more conscious goal and subject of study. Over the last fifty years, the basic tenets of Freudian psychology have become so absorbed into our thinking that they are no longer noteworthy. Spirituality and philanthropy now show up as topics in magazines on wealth management. Therapy comes in all shapes and sizes. Self-improvement is treated as rationally desirable rather than as a purely economic necessity or religious obligation. This environment should open up more people to new ways of thinking about families and inherited wealth.   Details

¨    The Velocity of Change.  The thinkers in the business economy have become obsessed with the idea of change. Some businesses follow tradition. The Zildjian Company made cymbals for musicians for over 300 years in Europe under the tradition of primogeniture. But the focus in the U.S. is neither on preserving the family business nor on refining the traditional manufacturing methods and marketing channels of long-established public companies, but instead is on globalization, volatile financial markets and new technologies. (The Zildjian Company moved to the U.S. in 1929, then radically changed its product offerings, and later in 1981 spun off a rival family company as a result of a sibling rivalry.) While the abrupt collapse of dot.com mania has muted the attention paid to some of the prophets of change, the business media today continues to play the same underlying themes, expecting that the pace of change will resume and accelerate.  Details

      This trend will affect the relationship between the family and the career choices of younger generations. This trend makes it more difficult for older generations to rely on their own past experience and perpetuate their view of the business world and of what it means to be successful. It becomes harder for one generation to presume that it has the ability and knowledge to map the course for the next generation.    Details    This could make it more difficult to perpetuate family values, but it may also allow children to more naturally establish their own way in the world without being “ pushed ” into independence by a down-sized inheritance. Details

¨    Success at an Early Age.  The emphasis on change also enhances the perception that there are now more opportunities for younger generations to succeed by capitalizing on events and, with luck, to move quickly from the educated middle class to the new rich.   It appears that financial success can now be attained at an earlier age.   Entrepreneurs also seem more likely to convert their success into marketable securities and move on to another challenge (the so-called “ serial entrepreneur ”) rather than live out their business life in one company. This may lead to these younger business leaders pursuing multiple career agendas over time, which may support the other trends that open up the possibility for new ways of thinking about wealth and family. Details

¨    Searching for Values.   In view of these trends, the advantage gained by inherited wealth may seem less meaningful, less of a head start, less secure, and less threatening, and the quest for pure financial success seems more of a race for fame than a test of merit. The term “ nouveau rich ” has fallen into disuse, which suggests that fewer people believe that “ old wealth ” is deployed with a steadier hand than new wealth. Value is still attached to productive pursuits but the range of “ useful ” activity seems more varied. The young still want to be rich, but “ changing the world ” is also on the agenda. “ Living well ” is not enough. Most notably, the new tech rich have coined the phrase “ venture philanthropy ” as a way of looking at how their wealth can be devoted to charitable purposes by actively involving donors and trying to achieve measurable results, but with a longer term view rather than a short-term grant mentality, similar to the disciplined “ business building ” attitude of the traditional venture capitalist.   Details

Does this mean that most people now believe that inherited wealth has become an irrelevant consideration, so that it somehow has only a beneficial impact on families and child development? Details
No, because there continues to be serious concern about this issue, particularly among first generation successful entrepreneurs.   Details

Yet it seems that the trends described above provide the opportunity to look at this issue in new ways, so that we have the ability to develop new choices - beyond “ to the kids ” or “ give it away to help the kids grow up ” and new models for what it means to “ give it away.” Consider the following line of analysis:

(1) Assume the real question has begun to move from the implicit assumption that inheriting “ too much ” money ruins a child to what the experts see as the more appropriate question: “ How can an abundance of wealth crowd out love and self-esteem, and how can I help avoid that result in my own family? ”

(2) The experts suggest a number of ways that parents can answer those questions, but for now let’s look just at the question of who owns the family wealth across generations. We know that some families have prospered more in business with each generation, but that doesn’t have to be the only answer to the question. Suppose the first generation wealthy entrepreneur does not want to take the risk that the money could “ spoil my kids? ” Or the children aren’t interested in business?

(3) That entrepreneur now has a dilemma. He or she achieved success by application of the "middle class" values of hard work and ambition, and finds it hard to see how a wealthy lifestyle can allow those values to continue in the next generation, since success has already been achieved and is now being enjoyed. The children already live a different life than the parents, so how can the past process be replicated? How can history repeat itself if the starting line has moved? Using the approach of minimizing the inheritance seems to be designed to move the children back to the original starting line. That seems difficult to achieve.  Details

(4) One step toward an answer may be to accept the obvious: people can succeed in more ways than making more money or building the business larger. Details How then could this “ new ” success be achieved? That is the challenge. Experts on child development advise that children need the freedom to pursue their own passion, and the parents should “ invest ” in it psychologically. But what if the parent disapproves of the passion?   Details More difficult still, how does this passion relate to the wealth?    Does the wealth become just an appendage of the family?   Can there be a connection between the wealth and the passion of the next generation?

(5) This line of thinking has led wealthy families in many instances to see family philanthropy as the answer to the entrepreneur’s dilemma. In particular, the family tax-exempt foundation allows the entrepreneur to “ give it away ” but “ keep it in the family. ” The wealth is not an appendage. It can be embedded in the family and help nurture the passion of the next generation.

(6) Can philanthropy in this way play a role in developing maturity in young adults? Some would say that helping the family manage wealth in a charitable foundation teaches responsibility and decision-making skills. Certainly managing any large foundation is hard work. But there is a contrary view that could be expressed in blunt terms something like these: “ No one ever learned to be a mature adult by giving away money and by making decisions that have no personal consequences. Life can’t be played as a video game. ” Can there be more to it than writing checks?  How can this activity be meaningful to the entrepreneur, whose most vivid frame of reference is his or her own driving motivation and hard-edged experience (“ I’m not in it for the money . . . that’s just a way of keeping score ”)? In building the first generation wealth, the entrepreneur has looked into "the eye of the tiger" -- and known fear, setbacks, failure, hard choices, personal embarrassment, sharp criticism, disloyalty, impossible deadlines, sleeplessness, joy, victory, luck and a bit of wonder . . . while feeling at personal risk. How can this be replicated?

(7) How also to engage the passion of the next generation in a family foundation? In many cases, unless the next generation can see its own passion -- what it feels strongly about -- as a key part of the goals of the family foundation, their role in it becomes an obligation -- not a calling.

(8) Is the family foundation then a poor substitute from the point of view of both generations? Let’s see if this has to be the answer.  Let’s take a political campaign as an example. Consider a high profile election campaign, or even a local election that is seriously contested. Aside from the difficult task of raising money, it has nothing to do with money, certainly not with making money. Yet, would anyone who has worked in such a campaign deny that it has, in some way, all of the risks, challenges, and emotional experiences noted in the entrepreneur’s own experience? No one who loses will starve in the same way as the entrepreneur would have, but the personal risk is there. It is not a “ life wrapped in cotton ” . Details

(9) This is not to suggest that the next generation needs to go into politics. But it makes it easier to understand how other activities - other than making money - can provide the challenge that brings out the values cherished by the entrepreneur, and that feeds positive independence, ambition and self-esteem. It also makes it possible to see how other activities can attract the passion of the next generation, without limiting their choices to a business or investment career. This gives us a new way of “ keeping score ” that doesn’t simply put the children in the same game as the parents, a situation that many want to avoid. It’s like being expected from the outset in life to be the next Babe Ruth or risk failure by comparison.

(10) But if we want these to include opportunities that connect to the family’s wealth, how can we develop models that provide this opportunity? Can the family foundation do this, along with venture philanthropy or something else? Certainly challenges abound in life in many callings, but can any be connected to the family’s wealth? Can the family foundation provide all or part of the answer to the entrepreneur’s dilemma, while capturing the spirit of the next generation as well?

(11) The traditional models do not serve that need very well. The ambit of the family foundation is too limited to meet that need in most cases. We have seen, for example, such foundations fall into disuse as time passes, especially after the death of the founders. Moreover, due to the constraints of the U.S. tax law, it is very unlikely that this model could provide enough freedom to offer the kinds of activities that could engage the time, effort and personal risk of the next generation at the level of intensity we are talking about. In order to develop a “ new way of keeping score ” we need a more flexible vehicle. This is an idea that we have been working on for some time, and we hope that others are too. Progress in that direction would offer a better solution to the entrepreneur’s dilemma.

Closing Note >>