Statistics reveal that 70% of wealthy families lose their wealth by the second generation, and 90% have exhausted it by the third. For families who have spent decades building successful businesses, accumulating real estate portfolios, or generating substantial income, this signifies a devastating erosion of wealth legacy.
However, according to Steven Bowles, CLU®, founder of Catalyst Advisory, this outcome can be avoided. After spending seven years working within a family office advisory group that serves ultra-high-net-worth families, Steven has seen firsthand what distinguishes families who create lasting legacies from those whose wealth dissipates within a generation or less than two.
“Wealth destruction across generations is the result of specific, preventable mistakes,” he explains. “The families who succeed long-term understand that protecting wealth requires as much intentionality and strategy as building it in the first place.”
Understanding the Two Primary Threats
Steven identifies two fundamental forces that destroy family wealth: erosion and division.
Erosion
Erosion mainly occurs through taxation. Under current law, estates valued above roughly $13.99 million for individuals or $27.98 million for married couples ($15 million /$30 million in 2026) are subject to a 40% federal estate tax on amounts exceeding those thresholds. Although recent legislative changes have provided some relief from scheduled reductions, the tax still significantly drains family wealth.
“When you look at balance sheets of wealthy families, especially those who’ve built wealth through businesses and real estate, you realize how quickly estate taxes can devastate a family’s financial legacy,” Steven notes. A family worth $50 million might face estate taxes in the millions. Without liquidity to pay those taxes, they’re forced to sell assets, often at unfavorable terms.”
The erosion issue worsens for families holding illiquid assets. Real estate investors and business owners often find themselves “asset rich but cash poor.” When estate taxes are due within nine months of death, families lacking sufficient liquidity face tough decisions.
Division
Division poses the second major threat when wealth is given directly to beneficiaries without adequate protection. Once assets go straight to heirs, they become at risk of bad decisions, divorces, lawsuits, and creditors.
“I’ve seen it countless times,” Steven says. “A successful first generation builds substantial wealth, then distributes it directly to their children. Within a few years, that wealth is gone. Not necessarily because the children are irresponsible, but because they weren’t prepared for life circumstances or business failures that depleted the assets.”
Why Traditional Approaches Fail
Many families follow the “do nothing” approach. They build wealth but don’t use formal strategies to protect it. Sometimes they have a simple will, but nothing more advanced.
“Allowing a significant inheritance to pass directly to your children without structure creates problems,” Steven warns. “It exposes them to risks they may not be equipped to handle.”
Traditional estate planning usually divides assets equally among heirs without considering family relationships, individual skills, or asset types. For example, a business making up 80% of a family’s net worth might be split among siblings with different interests or abilities to manage it.
Perhaps most importantly, many families do not communicate effectively across generations. Wealth creators who are first-generation investors, often preoccupied with developing their wealth, may overlook the importance of educating their children about managing wealth, understanding the roots of the family’s prosperity, or the core values that fueled their accomplishments.
The Missing Ingredient: The Family Constitution
Beyond legal frameworks, successful multi-generational families use something Steven calls a family constitution. This values-driven structure guides how wealth is managed and passed on.
“A family constitution isn’t a legally binding document,” Steven explains. “It’s a statement of values, expectations, and principles that guide the family’s relationship with wealth. It answers questions like: What do we believe about money? What responsibilities come with being a beneficiary? What opportunities should wealth create for future generations?”
This document works alongside trusts and legal structures to create a framework for wealth preservation. It might outline expectations for work ethic, education, or charitable giving. It could establish processes for accessing family resources or making major financial decisions.
The constitution gains particular strength when paired with early estate planning. Rather than children discovering their inheritance only after a parent’s passing, they learn about the family’s wealth strategy early on, their future roles as stewards, and their opportunities.
“The families who do this well aren’t raising kids who feel entitled to wealth,” Steven notes. They’re raising kids who understand they have a responsibility to preserve and grow what they’ve inherited, and to prepare the next generation to do the same.
Strategic Tools for Wealth Preservation
Families can employ several powerful tools to break the three-generation curse. They must understand the threats and the importance of values-based planning.
Irrevocable Trusts
Irrevocable trusts are among the most effective tools for transferring assets out of the taxable estate while maintaining control over how those assets are used for future generations. Unlike revocable trusts, which remain part of the estate for tax purposes, irrevocable trusts establish a legal separation between the grantor and the assets. When correctly set up, these trusts can last for multiple generations, offering benefits to heirs and shielding assets from taxes, creditors, and poor financial decisions.
Steven frequently recommends that these trusts include HEMS provisions, which permit distributions for Health, Education, Maintenance, and Support.
“This approach provides for beneficiaries’ genuine needs while preventing them from simply liquidating the trust for poor reasons,” he emphasizes.
Advanced strategies include general partner and limited partner structures that enable discounted valuations during asset transfers.
“If you have non-voting shares or limited partnership interests, you can often move a dollar of value using only 60 or 70 cents of your exemption,” Steven notes. That level of efficiency can save families millions in estate taxes.”
These multi-generational trusts, often called dynasty trusts, can last for decades or centuries, depending on state law. Instead of being taxed and divided with each generation, the wealth stays protected and grows within the trust structure.
Life Insurance as a Liquidity Solution
Life insurance is an essential estate liquidity tool for families with significant illiquid assets. Steven observed that this strategy is frequently used in his family office work.
“If you own $100 million in real estate and businesses, your estate will owe substantial taxes,” he explains. “Without liquidity, your family is forced to sell properties or business interests quickly, often below market value. Life insurance creates tax-free capital precisely when it’s needed most.”
Steven frequently recommends premium finance strategies for ultra-high-net-worth families, utilizing bank loans to fund life insurance policies held in irrevocable trusts.
“Banks will lend money to trusts with appropriate collateral,” he notes. “This allows families to create substantial death benefits without depleting their own capital.”
The insurance policy is structured with high cash values that grow over time to cover the bank loan, resulting in a fully-paid policy that offers liquidity upon death. Meanwhile, the death benefit stays outside the taxable estate because the trust owns it.
“For a real estate investor with a $50 million portfolio, a $10-15 million life insurance policy in an irrevocable trust might be the difference between the family keeping the properties or having to liquidate everything,” Steven says.
Proper Business Structuring
Steven highlights the importance of proper entity structuring as families build wealth through real estate and business investments.
“At some point, if you’re serious about building wealth outside the traditional W-2 and savings accounts, you need to structure yourself more like a business,” he advises.
That could involve holding companies, LLCs for various properties, or GP/LP structures supporting asset protection and smooth wealth transfer.
These structures serve various functions. They safeguard assets from liability, enable family members to acquire ownership stakes, and allow for discounted transfers to trusts through valuation methods.
For business owners, funded buy-sell agreements provide essential protection.
I’ve seen too many businesses without proper succession plans,” Steven notes. “A sudden death creates chaos. Partners or heirs are forced to scramble. A properly funded buy-sell agreement, often using life insurance, ensures business continuity and fair treatment of all parties.
Legacy By Design, Not Default
The three-generation curse is not an unavoidable fate. It is the expected outcome of neglecting the twin dangers of erosion and division, but it can be overcome through careful planning, diligent work, and meticulous financial structuring.
Families who successfully transfer wealth across generations do so through planning that involves legal structures, tax strategies, asset protection, and values-based education. By understanding that the wealth they’ve built deserves the same focus, plan, and purpose during the transfer as it did during the accumulation, many families have proven capable of preserving and building upon it.
“I’ve worked with families who’ve done this brilliantly,” Steven reflects. “The wealth continues to grow, each generation has opportunities that the previous generation created, and there’s a genuine sense of stewardship rather than entitlement. That’s what multi-generational wealth looks like when it’s done right.”
For families building wealth, the message is clear: your planning today determines whether your legacy lasts decades or disappears within a generation. The curse is real, but it’s also entirely preventable.
