FIDUCIE, DEATH, DYNASTY AND BEYOND
Can a fortune be passed on across several generations ?
According to an American study by the University of Pennsylvania dating from the 1980s, 70% of the family estate passed on at death will have evaporated by the second generation and close to 90% by the third generation. This phenomenon, nicknamed the “three-generation curse”, did not wait for that American study but is in fact found, from time immemorial, in every culture.
Indeed, these statistics appear to confirm a well-known adage of the business world, according to which the father creates, the son maintains and the grandson squanders. The implication is that the second generation rides on the founder’s success, while the third, born with a silver spoon in its mouth, proves idle and ends up putting a stop to the family’s entrepreneurial venture. This so-called third-generation curse is said to affect more than French houses alone. The same idea is found in other languages, such as Brazilian (“rich father, noble son, poor grandson“), English (“from clogs to clogs is only three generations“) or Chinese (“wealth never survives the third generation“).
Several current examples are a reminder of this, such as the collapse, in France, of the Lagardère group in only a few years.
More recently, in 2018, McKinsey reported that since 2010 an S&P 500 company has had an average life expectancy of 14 years, against 90 in 1935; and the downward trend is only accelerating.
In a self-centred world that is increasingly selfish and individualistic, the age is one in which everything is precarious, and preserving the work and efforts of others is no longer the rule.
But after all, in 100 years, who will still remember you? In a century we shall all be buried alongside our parents and friends. Strangers will live in the house you put so much energy into buying, and they will own absolutely everything you have today. The fashionable car you bought for a small fortune will be scrap, and your descendants will not know who you were, nor will they even remember you. After all, how many of us know our grandfather’s father?
After your death you will be remembered for a few years at most. We shall be no more than a portrait in a photograph album on someone’s bookshelf and, a few years later still, your story, your deeds and your photographs will no longer even exist and, for those people who will live in what we own today, we shall not even be a memory.
Will your great-great-grandson think, even for a moment, of the efforts you had to make and the risks you took to acquire this wealth when he sees your photograph, yellowed by time, in a dusty album, or of those of his great-grandfather (your own son), or indeed of those of his forebears, when he receives a large bank transfer and property by way of inheritance without having made the slightest effort other than being born?
Will your great-grandson/granddaughter have the same abilities, the same desires, the same encounters or even the same luck as you? Will he or she wish to keep and preserve all of this, or would they rather squander it in a few months or years?
What large private fortunes do in order to endure
In practice, nothing is less certain.
The risk is moreover far from theoretical and, reaching the same conclusions, American billionaires (W. Buffet, P. Allen, S. Jobs, B. Gates, etc.), as well as European and Asian ones, all undertake to give their fortune to foundations while methodically refraining from transferring it to their children (having first ensured, through Trusts and fiducies — the French-law fiducie — that they will never want for anything), not only so that they do not foolishly squander it on divorces and other frivolous spending, but above all in order to compel them to acquire a taste for work and effort, having grown up in luxury from the earliest age.
Decline is nevertheless not inevitable, in particular for the members of the Hénokiens association. That association brings together family businesses that are two hundred years old and more. Among the 52 members (only): the Hoshi family, innkeepers since 718 in Japan, gives grounds for hope and for believing that everything remains possible, provided one is well organised.
But beyond principles and hope, there is above all a reality, a technicality and a rigour in the organisation and protection of wealth, which must imperatively be put in place as early as possible by anyone who has ambitions for their wealth and wants results.
In this respect, it is worth recalling that the richest man in History, John D. Rockefeller, founder of Standard Oil, made a habit of repeating the phrase that has since become famous « What counts is not to own everything, but to control everything », to which he added « beware of the ingratitude of your children above all else ».
The example of the Rockefeller Trusts
Applying his own principles to the letter, John D. Rockefeller created several trusts, one per child, to make certain that his estate, even after the break-up of Standard Oil, would never be squandered by his descendants.
These Trusts are still in operation more than 170 years after his death and have more than tenfold increased his estate, which secures the prosperity of all his descendants and the funding of charitable works.
The example is worth pausing over for anyone who considers that a lifetime’s efforts have value and must be respected.
At HARLINGTON, that is our conviction.
Frequently asked questions on passing on an estate across several generations
Can a fortune be passed on across several generations?
Yes, but it must be anticipated. Without organisation, an estate is often diluted within two or three generations. Instruments such as the fiducie (the French-law fiducie), foundations and dynastic structures make it possible to frame the management and to preserve the capital over time.
What is a dynastic structure?
A dynastic structure (trust, foundation, long-term fiducie) seeks to preserve and pass on a family estate across several generations by framing its use, preventing its dispersal and protecting the heirs from imprudent management.
How do great families preserve their wealth?
Great wealthy families, such as the Rockefellers with their trusts, resort to structures which separate ownership from enjoyment, professionalise the management and lay down strict rules of family governance in order to endure.
Can the fiducie play this role under French law?
The French fiducie, although limited in its duration (99 years maximum) and prohibited in matters of gratuitous transfer, nevertheless makes it possible to organise a supervised management and a controlled transmission, in addition to other wealth instruments.
How can I prevent my heirs from squandering the estate?
By entrusting the management to a Fiduciaire or by framing the payments (annuity, conditions of use), you protect the capital against dissipation. Family governance and the education of the heirs usefully complement these arrangements.
The House of Harlington since
2006