How Long Can Wealth Really Last?

I’ve been thinking a lot lately about the idea of multi-generational wealth. Is it possible for wealth to survive multiple generations? Is it even advisable? 

Most cultures have some description of the transience of wealth. The philosopher Voltaire once wrote that history is full of the sound of wooden clogs going up the stairs, and silk slippers coming down.

In Japan, the expression is “rice paddies to rice paddies in 3 generations.” In Scotland, “shirtsleeves to shirtsleeves.” Granddad might start out as a humble farmer, and then work his way up to become a person of greater standing and influence. Only for his great-grandchildren to start over without notable advantage or wealth.

Human nature seems to resist the very idea of perpetual wealth. With rare exceptions, family fortunes are made and lost relatively quickly.

Some of this is behavioral. If you grow up poor, you might be more apt to work really hard, save aggressively, and accumulate wealth, even at great sacrifice. Conversely, if you grew up in a wealthy household, your “normal standard of living” might well exceed what you actually earn.

But some of the constraint is simple math. As your number of descendants grows, your wealth is spread across more people. Splitting your estate between two kids, for instance, means that each child will receive half. Yet your investments will also grow over time. So it's a question of whether the portfolio's growth can outpace distributions and a growing family tree.

I found myself wondering whether you could design an estate structure that addresses both problems. Can you guard against the human propensity to spend down an estate, and invest the principal in such a way that it lasts for multiple generations?

[Side Note: I was originally going to share all the math in this article, but I think some readers would rather have a root canal, so for now I’ll just summarize the key takeaways of the hypothetical. For root-canal enthusiasts, however, you can find the walk-through here: https://www.pihlfinancialplanning.com/post/can-you-design-a-portfolio-to-sustain-truly-multigenerational-wealth] 

Here’s the short version of the hypothetical I ran:

Someone passes away in 1960 leaving behind an estate worth 10 million dollars in today’s dollars. They set up their estate with the goal of having the money last as long as possible, even if that means making less money available to their heirs in the short term. Therefore, they invested it all in the S&P 500, and set up their documents so that the heirs could only spend the dividends produced by the investments, and not spend down any of the principal. Each of the heirs have 2 kids at age 30, and the kids become eligible for income at age 20. Income is split evenly among all surviving heirs.

What happens is that the income grows faster than inflation, but due to the growth of the family, by 2020, each heir is receiving $43,793 annually, in today’s dollars. 

Have we achieved multigenerational wealth? 

It depends how you define it. The trust has reached the great-great-grandchildren of the deceased and is still distributing a meaningful income to every member of the family. That income is sufficient to fund education, reduce financial pressure in early adulthood, and create flexibility at important life stages.

And yet, without their own careers and savings, these heirs would not be considered wealthy by most people. An annual income of $43,793 does not sustain a lavish lifestyle. What it does provide is stability and optionality, particularly for young adults whose earning power is still developing. It is a supplement to their income, not a replacement.

Is this a good idea?

• In some ways, the framework aligns with how I would prefer to leave money to my heirs, directing it toward earlier stages of life, when the money can create opportunities, rather than delivering a large sum at the end of a career. Such money would be incrementally, “nice to have” but not life-changing to the extent it would be for recipients earlier on. 

• Smaller amounts received as income are generally less destabilizing than large lump-sum inheritances. Preserving principal may allow the benefit to extend across generations, even if one node in the family mismanages its own finances.

• And yet, providing a guaranteed income at a young age carries risks. It can reduce personal responsibility, and create entitlement.

• Too, research cited in The Millionaire Next Door suggests that large inheritances can reduce future earnings and wealth accumulation.

• But financial pressure is not always a virtue. Reduced stress in early adulthood might allow for deeper education, exploration, and personal growth beyond what might appear on a balance sheet. 

• Financial stability might allow someone to teach, create art, care for family, or choose other meaningful work over maximizing income. 

Could this work in practice? 

Short answer: In it's current structure, not really. The larger point is to illustrate how hard it is to create and sustain true multigenerational wealth. Even if your heirs spend modestly relative to the size of the portfolio, each of the first few generations will get less and less until the income plateaus at an amount that can supplement their income, but hardly provide for a normal lifestyle, let alone a wealthy one. Other issues include: 

• The way I set this up effectively penalizes having kids, so it’s possible that the wealth survives, but that there aren’t any future generations to hand it to. I think this defeats the intended purpose.

• Having more than 2 kids would permanently impair the income for yourself, your parents, your kids, and your grandkids. While the income would never go all the way to zero, there is a point where it ceases to meaningfully improve anyone’s standard of living. 

• My math also ignores estate taxes, which could drastically reduce the principal of the trust and the income derived from it.

• Legally, this structure may not even be viable. Most states do not allow this sort of "perpetual trust." Implementation may require future generations to voluntarily forgo spending principal so that future generations can continue to receive income. But of course, what usually happens when you allow such discretion is that all the principal gets spent within 2 generations. Shirtsleeves to shirtsleeves…

Overall conclusion: 

I’m intrigued by the theory, though it would require further refinement and proper legal design. While I think the structure is interesting, it cannot solve the deeper human problem all on its own. Even if the money lasts, I think the impact of an inheritance depends less on the financial math and more on the people involved.

Money makes people more of what they already are. In a responsible young adult, it may expand opportunities. For someone unprepared, it could amplify their limitations. A thoughtful trust structure can mitigate risk, but it cannot by itself guarantee a good outcome.

You can spend endless time tinkering and trying to find the best estate plan that will maximize the chances of success for your kids and grandkids. But personally, I think everyone (yourself included) will be better served by just spending quality time with them and sharing some meaningful experiences.

In the end, your legacy has a lot more to do with the quality of your relationships than with the structure of your trust.