Inheritance: The Mistake of Not Passing Down Knowledge

Summary

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WSJ Your Money Briefing

Episode: Inheritance: The Mistake of Not Passing Down Knowledge
Date: November 26, 2018
Host: J.R. Whalen
Guest: Stephen Lewis, Principal and Financial Advisor at Alliance Bernstein

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Episode Overview

This episode centers around the historic transfer of generational wealth – an estimated $30 trillion – poised to move from older to younger generations. The conversation highlights that while money itself is significant, the major mistake families make is failing to pass along financial knowledge and family values alongside the wealth. Stephen Lewis joins to discuss how families can approach inheritance more holistically to ensure lasting wealth and financial success for future generations.

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Key Discussion Points & Insights

The Knowledge Gap in Generational Transfers

• Wealth at Stake: Millennials are expected to inherit as much as $30 trillion.
• The Core Mistake: Many families focus on transferring assets but neglect to teach the next generation how to build, preserve, and grow wealth.
• Historical Losses:
  • “History would suggest that about 70% of that [wealth] will be lost by the second generation and 90% will be lost by the third generation.”
    — Stephen Lewis (03:23)

The Three Pillars to Effective Inheritance

• What Should Be Passed Down?
  1. Wealth itself
  2. Knowledge about how to build and manage wealth
  3. Family values
• Formula for Success:
  • "You need to have a combination of wealth with knowledge and values for it to be more productive than destructive."
    — Stephen Lewis (03:52)

Involving the Next Generation

• Curiosity and Responsibility: Families should nurture curiosity in heirs about how the wealth was accumulated and foster a sense of responsibility in managing it.
• Exposure to Professionals:
  • Encouragement for the next generation to begin relationships with family advisors (tax, legal, investment) early on.
  • "The sooner they can start to build those relationships, the sooner they can become comfortable asking questions directly..."
    — Stephen Lewis (04:36)

The Role of Professionals in Education

• While professionals are crucial (tax, legal, investment), it’s not enough for parents to delegate financial education entirely to them.
• Children should be comfortable engaging directly with advisors, not solely relying on parental guidance (04:13–04:52).

Teaching Delayed Gratification

• Significance: The ability to delay gratification (self-control around spending and saving) is one of the most predictive indicators of future financial success.
• The Marshmallow Test:
  • Reference to the classic Stanford experiment showing long-term success for children who resisted eating a marshmallow to get a greater reward.
  • "Those children that were able to delay gratification... had better SAT scores, better life coping skills, better body mass indexes, and overall more success in life."
    — Stephen Lewis (05:31)

Family Structure and the Compounding Effect

• Not Just Equal Slices: Simply dividing assets among children can undermine the long-term potential for wealth due to loss of investment scale.
• Efficiency of Keeping Wealth Together:
  • “When they do that small bucket breakup, they lose the efficiencies of scale of the larger investment pool.”
    — Stephen Lewis (06:31)
  • Notable successful families (DuPonts, Pritzkers) run their wealth as a business, maintaining governance, boards of advisors, and unified investment strategies for sustained growth.
• Practical Implication: Pooling resources allows for more significant investment opportunities, better fee structures, and perpetuates wealth across generations (06:31–07:05).

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Notable Quotes & Memorable Moments

• "How do we give our kids a leg up without giving them two legs up on a couch? And so much of that is about providing education along with the wealth and values of the family..."
  — Stephen Lewis (02:34)

• "It's all a matter of how you eat the marshmallow that makes the difference."
  — Stephen Lewis, jokingly (05:54)

• "The families that have been the most successful... have run their family money as a business, and they run it with governance, and they run it with a board of advisors."
  — Stephen Lewis (06:50)

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Important Timestamps

• 00:20-02:31: Host sets up context; importance of knowledge in inheritance; introduces Stephen Lewis.
• 02:31-03:52: Risks of wealth transfer without knowledge; historical statistics; the three things to pass on.
• 04:06-04:52: The role of professionals and building multigenerational relationships.
• 04:52-05:52: Importance of delayed gratification and summary of the marshmallow experiment.
• 06:00-07:05: Dangers of splitting family wealth; benefits of treating wealth like a business.

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Tone & Style

• Language: Informative, conversational, and practical, with moments of wit and humor (e.g., marshmallow joke).
• Delivery: Straightforward, with clear, actionable advice and real-world references.

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Summary Takeaways

For families preparing to pass down wealth, the episode strongly emphasizes that transferring money alone is not sufficient. Sustaining wealth across generations requires a deliberate blend of financial literacy, engagement with professional advisors, strong family values, and strategic organization—ideally treating family wealth as a business to harness the power of unity and scale.

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For further financial insights and strategies, continue to follow WSJ’s Your Money Briefing.

Transcript

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[J.R. Whalen]

With your Money briefing. I'm J.R. whalen at the Wall Street Journal in New York. There's upwards of $30 trillion in generational wealth ready to be passed down to a younger generation. Money is one thing, but the biggest mistake families make is not transferring knowledge. We'll explore that in a moment. First, these money and market stories you should know as Congress returns from Thanksgiving. There are numerous tax and finance items on its to do list before the end of the year, among them making it easier for small employers to band together to offer 401k type plans. The House version of that provision would create a new type of universal savings account where money would grow tax free and could be used for non retirement purposes. Features a provision to allow unborn children to be named beneficiaries of tax advantaged 529 college savings accounts. And Bitcoin's free fall isn't done yet. That's the word from the chief market analyst at ThinkMarkets in the UK. He says after its failed attempt to break above the $4,700 level, Bitcoin is likely to move even lower. And he says the regulatory environment is keeping Bitcoin buyers on the sidelines. Elsewhere, the widespread declines in cryptocurrencies are causing the currency known as ether to take a beating as well. That's because it's the currency most often distributed when a crypto related venture pursues an initial coin offering, or ico. Now that a large number of fraudulent coins have been eliminated from the system, that's making Ethereum, the company behind Ether, less valuable. By many estimates, millennials are in line to inherit as much as $30 trillion from their elders. But money isn't everything. The intellectual capital and instinct to be fiscally smart with wealth transfer or with their own income and assets is just as important. But are elders transferring enough knowledge to their children? Steven Lewis is principal and financial advisor at Alliance Bernstein, and he's here with us to discuss. So Stephen, in your research you've seen that wealthy in particular don't always educate their children on how to build and maintain wealth.

[Stephen Lewis]

No? That's right, J.R. and you know, the question I get oftentimes is how do we give our kids a leg up without giving them two legs up on a couch? And so much of that Is about providing education along with the wealth that comes along and values of the family in addition to that education.

[J.R. Whalen]

Now, this is the largest transfer of generational wealth on record, and it comes with a lot of responsibility, not just on the part of the parents, but also on the part of the children.

[Stephen Lewis]

One of the big challenges in this area is how do we get that next generation to have a curiosity, a desire to learn more about where the wealth came from and take some responsibility to take it upon themselves to take the reins and start dealing with more of the family wealth over time. One of the things that we really were surprising when I went through and did the research is that when you look at the data historically, it shows that of the wealth that is supposed to be transferred in the next few generations, history would suggest that about 70% of that will be lost by the second generation and 90% will be lost by the third generation. And that's a huge amount of wealth destruction. Over time, we were able to identify that there were really three things that you can pass on to your heirs. And so often we only talk about the side of it being the wealth or the money. There's really three things. There's the wealth, there's the knowledge of how to build and manage wealth, and it's the family values that go along. As the third thing. You need to have a combination of wealth with knowledge and values for it to be more productive than destructive.

[J.R. Whalen]

You know, many parents just aren't comfortable enough with their own financial knowledge to sit their kids down, so they hire a professional. Is that enough?

[Stephen Lewis]

I think it's really important to have a professional team that encompasses everything from the tax side to the investment side, to the legal side. And the earlier you can start to introduce those professionals to the next generation, the better. And they'll have contacts that they can go to to ask questions if the parents aren't comfortable answering those questions. So it's important that the next generation start to build their own relationships with the family's advisors, Whether they be the legal, the tax, or the investment side, because the sooner they can start to build those relationships, the sooner they can become comfortable asking questions directly and not always being in the position of having to go to the generation above them to get answers.

[J.R. Whalen]

Now, you've written that understanding delayed gratification can be a good lesson for children. What did you mean by that?

[Stephen Lewis]

Research has shown that one of the number one indicators of success in the future is the ability for our next generation, our heirs, to be able to delay gratification. A lot of this research came out in the 1960s with the marshmallow test that Stanford became so famous for. The marshmallow experiment was an experiment in the 1960s where they would put a marshmallow or a cookie or something in front of about a five year old child and they would say, if you don't eat the marshmallow by the time I come back in about five minutes, I'll bring you a second marshmallow. And what they did was they observed them not only that day on whether or not they would eat or not eat the marshmallow, they followed them for years and years into their lives and they were able to determine that those children that were able to delay gratification, not eat the marshmallow in their future lives had better SAT scores, better life coping skills, better body mass indexes, and overall more success in life.

[J.R. Whalen]

And we're told marshmallows and cookies aren't good for us.

[Stephen Lewis]

How dare they, how dare they say that they're not good for us. It's all a matter of how you eat the marshmallow that makes the difference.

[J.R. Whalen]

You know, Stephen, in many cases families aren't dealing with just one child. They have multiple children. And you say that simply splitting up finances isn't enough because of the compounding effect. What is that?

[Stephen Lewis]

So the compounding effect is the ability to have money last generation after generation when there's more resources asking for the use of that money. So think about how the next generation, after getting married and having kids, tends to be a larger generation than the one before, and then the one after that even larger. So often families will start breaking money up into small buckets so that each individual person can do what they would like to do with that money. And when they do that small bucket breakup, they lose the efficiencies of scale of the larger investment pool. The families that have been the most successful over time, when you look at the, the, the Duponts, the Pritzkers, some of the most famous families in history, they have run their family money as a business, and they run it with governance, and they run it with a board of advisors. And they keep the money together as much as possible so that they get the investment opportunities, they get the efficiencies of scale, and they get better fee structures and an overall better result for generations to come.

[J.R. Whalen]

All right, that's great advice for families on how to transfer generational wealth to their children and to the rest of their family. That's Stephen Lewis. He's principal and financial advisor at Alliance Bernstein. Stephen, thanks for being with us. Thanks, J.R. and that's your money briefing. I'm J.R. whalen in New York for the Wall Street Journal.

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