The Myth of the Trust Fund Baby

The recession through which the world recently suffered has raised many questions on whether the rich deserve to be richer by far than the rest of the population.

A new study (from , reported on by CNBC today says that the richest 85 people in the world have more than the bottom 3.5 billion of the rest.

Barrack Obama is making income inequality a 2014 campaign issue.

Some even think that the disparity will cause social instability – as noted in the Outlook on the Global Agenda 2014 – reported by OxFam:

“Outlook on the Global Agenda 2014’, in which it ranked widening income disparities as the second greatest worldwide risk in the coming 12 to 18 months. Based on those surveyed, inequality is ‘impacting social stability within countries and threatening security on a global scale.”

Historically, the American credo has been anyone can succeed. Rags to riches stories are legendary and much loved in the USA. Now we are lamenting the end of the middle class and the rise of ‘the one percent’.

Why then, do I propose to help families ‘keep their wealth and well being for generations’? Am I subversive in trying to shed light on why and how families can pass wealth from generation to generation? Am I helping to create dynasty families with trust fund baby’s generation after generation?

A helping hand.

I’m not necessarily in favor of developing a caste system in America (or continuing one in any part of the world). I want to continue the ability for our citizens to generate rags to riches stories, to earn vast fortunes, or even modest lifetime savings.

I am in favor of is giving the next generation a hand up. What parent doesn’t want a better life for their child than they had? What grandparent wants to see his grandchild struggle through poverty – repeating a never ending cycle of starting from scratch to make their way in the world?

The hand up isn’t always money.

As James E. Hughes notes in Family Wealth – Keeping It in the Family,

“Families fail to understand that wealth preservation is a dynamic, not static, process and that each generation of the family must be a first generation – a wealth creating generation.”

The people who are currently the world’s richest, therefore, are not the same people who will be the worlds richest next year or the year after. While there may be babies born with trust funds, unless each generation contributes to the capital, the next generation will not have trust fund babies. There is a myth in our minds that generation after generation of do-nothing trust fund babies exist. I just don’t believe that is the case.

Keeping wealth from generation to generation requires wealth creation, not inheritance.

Families grow over time. One couple has two children who each have three children. Where there once were two, there are now 10. The population of cousins gets bigger and bigger with each generation. A vast fortune would soon be dissipated if it were merely handed from generation to generation, without each generation earning their keep and adding to the assets.

Parents and grandparents creating an environment of knowledge, access to opportunities and persistent effort towards a goal are huge contributors to a family’s ability to keep wealth for multiple generations.

Other causes for failure to keep wealth across generations.

Hughes lists 7 reasons family wealth is dissipated over time. The first was listed above – each generation must create wealth. The rest are:

  • Families have to develop family member’s abilities and intellect, not just tend to the money.
  • You have to think really long term and not just in terms of 10 or 20 years, but in terms of an entire generation. If the first generation decides it is done at 55 or 65 and just eats resources the rest of their lives, wealth creation is not occurring. If instead, that first generation keeps generating income, and using it to develop the next generation, wealth creation may continue to happen.
  • Families don’t understand that by maintaining the status quo, they are actually dissipating future wealth.
  • Quality measures are not being used to judge wealth. Families should ask if members are thriving; is there a contract between the generations that is working and keeping members involved; is there a method available to members to leave the family if they want – and do members know what that is; and are the family leaders leading?
  • The family doesn’t pass along legacy stories and history.
  • No one understands how much work it is to keep family wealth for extended generations. Many families aren’t willing to expend the effort.

Equal opportunity, not equal wealth or income.

The promise of America is was that a person can come here and make something of them self. There is equal opportunity for everyone to do their best and achieve their greatest.

Rich or poor, we all have the opportunity to create an environment that values the ‘human, intellectual and financial’ capital of our family.

If we, as a nation, decide to create income equality by forcing everyone to be paid the same, or have the same amount of money, what incentive will there be to forge ahead, to persist in the face of difficulty, to invent the un-inventable and to pass along values of hard work pays off, persistence and self sufficiency to our children.

Shall Atlas Shrug again?

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