Ethan R. Okura
Hawai‘i Herald Columnist

Are you familiar with the proverb, “Shirtsleeves to Shirtsleeves in Three Generations?” Or maybe you’ve heard the saying as: “Rags to Riches to Rags in Three Generations.” The ancient Chinese version of this proverb is Fu bu guo san dai, which roughly translates to, “Wealth does not sustain beyond three generations.”

Various cultures throughout history have seen this same pattern. The first generation works hard, creates success and builds wealth; the second generation preserves it and transfers it; and the third generation (or sometimes subsequent generations) spends it until it is completely depleted.

Why is this pattern so universal? Is there anything we can do to change the outcome? In this month’s column, we’ll examine this phenomenon and see how the outcome can possibly be reversed.

At our firm, we see many families’ estates — some through multiple generations. The fundamental problems here are education, knowledge, and personal or family values. We often encounter this situation in our clients’ lives, whether the estate represents a modest amount of wealth (under $1 million dollars, including the home), or financial success worth hundreds of millions of dollars.

In most cases, the generation that created the family wealth has deeply ingrained values of thrift, frugality, hard work and tenacity. They truly appreciate the value of a dollar because they know first-hand how hard they worked to earn it and to save that first bit of capital that they used to create the financial success they ultimately achieved. Oftentimes, the second generation grew up with very little and saw their parents work hard to achieve their success, benefiting from it only later in their lives, if at all. The third generation usually begins their life accepting the fact that their family has access to money and other resources. They tend to not ever know financial hardship in the same way as their parents or grandparents. Sometimes they are spoiled as children or grow up feeling that they are entitled to the best of everything.

Estate planning is traditionally concerned only with the mechanics of passing on wealth to heirs, minimizing estate and gift taxes and avoiding probate. However, what we have come to realize in the modern era of estate planning is that it is also important to pass on family values and knowledge. Families with dynastic or multigenerational wealth that survives many generations tend to do things such as bring in the next generation early on to learn how to operate and ultimately take over the family business; involve the children in discussions about family finances, where to spend money and how to invest it; and discuss what charitable causes and institutions the family wishes to support.

Although this process should start well before one’s death, it is often helpful to prepare an “ethical will” or a “legacy letter” — a document intended to pass on one’s values, wisdom and love to future generations. It is not a legal document to enforce any restrictions on the use of an inheritance or to demand certain actions of family members. Rather, it stands as a statement of life’s purpose, family history, and cultural or spiritual values. Even though it does not carry any legal weight, taking time to write a thoughtful ethical will or legacy letter can help to clarify your goals, values and vision, allowing you to better work with your lawyer about how you want to design your estate plan. Some clients use it as a guide to subsequently include restrictions in their will and trust requiring that their children and grandchildren be drug-tested, graduate from college and/or be working full-time before they are eligible to receive any inheritance from their share of the trust.

Historically, an ethical will stems from early Judeo-Christian traditions. There are examples of them in the Bible and have continued as a practice to this day, especially in the Jewish community. A nonreligious modern example was former President Barack Obama’s legacy letter to his daughters dated Jan. 18, 2009, the eve of his inauguration as president.

Even if each generation does its best to teach the succeeding generation the value of hard work, of saving for the future and investing wisely, the lessons don’t always stick. Sometimes the previous generation does not have the right knowledge to teach their children how to preserve wealth in a new era, even if they had the know-how to acquire and accumulate it in decades past.

Regardless, we find that those who take the time to pass on family values and involve their descendants early on in the process of financial and business management tend to see their generational wealth continue much longer than the standard return to poverty by the third generation.

*For more information on Ethical Wills/Legacy Letters, see the following web pages:

Honolulu Office  (808) 593-8885
Hilo Office          (808) 935-3344

Ethan R. Okura received his doctor of jurisprudence degree from Columbia University in 2002. He specializes in estate planning to protect assets from nursing home costs, probate, estate taxes and creditors.

This written advice was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. (The foregoing legend has been affixed pursuant to U.S. Treasury Regulations governing tax practice.)

This column is for general information only. The facts of your case may change the advice given. Do not rely on the information in this column without consulting an estate planning specialist.

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