Written by Bob Barber
Proverbs 20:21 An inheritance gained prematurely will not be blessed ultimately.
An old financial planning adage warns: “Shirtsleeves to shirtsleeves in three generations.” Generation one creates wealth, generation two lives off it, and generation three spends the rest. The team at Christian Financial Advisors® has observed this pattern play out in many families. While this cycle has persisted for centuries, it doesn’t have to continue.
The biggest mistake families make is dividing wealth among heirs immediately upon death instead of keeping it together and distributing only earnings—not principal—to following generations. Wealth creates wealth through compound interest, but when split up, it loses the compounding power of large sums.
Dangers of Leaving a Large Inheritance
- Rapid depletion – Inheritances are typically spent within 2-3 years, regardless of amount.
- Behavioral problems – Large unearned windfalls can trigger speculative investing, create a false sense of accomplishment, and compound irresponsible behaviors (e.g. overspending or substance abuse).
- Lack of financial wisdom – Heirs who haven’t built wealth slowly often don’t understand how to manage or preserve it, making them fraud targets and removing their motivation to work.
- Generational disconnect – Without understanding the sacrifice behind the wealth, heirs may fail to respect or properly steward the resources. If heirs don’t work or develop their own financial discipline, then their heirs will exacerbate the 2nd generation’s problems.
The Correct Way to Structure a Large Inheritance
- Establish a trust or limited partnership that distributes wealth slowly over time while keeping it together to maintain compounding power.
- Conduct family financial meetings before death to ensure heirs understand how the wealth was built and equip them with sound financial principles.
- Implement pre-inheritance experiences using Matthew 25:14-30 (the Parable of the Talents) by giving heirs portions while you’re alive to observe their stewardship.
“Whoever is faithful in very little is also faithful in much, and whoever is unrighteous in very little is also unrighteous in much.” Luke 16:10 - Design incentive-based distributions and appoint a corporate trustee. Distributions should match heirs’ savings, reward sound money principles, and give at the same measured pace the wealth was accumulated. These provisions should be detailed in writing for the corporate trustee to follow.
Wisdom must be inherited before a financial inheritance.
Proverbs 17:16 Why does a fool have money in his hand with no intention of buying wisdom?
Wealth builders worked, saved, and sacrificed—which taught them to respect wealth. Shouldn’t heirs do the same? Wealth in the hands of a fool compounds foolishness. Wealth in the hands of the wise compounds wisdom.
Want to learn more about setting up an inheritance for multi-generational success?
Schedule a meeting online at cfa.lc/qwa or call/text us at 830-609-6986. Appointments are available in-person, by phone, and by video.