Raising Capable Heirs: Preparing the Next Generation

Nearly every family that has built significant wealth carries the same private question, and it is rarely about the money. Will this help my children or hurt them? It deserves a better answer than the industry usually offers.

The statistic you have heard, and why we do not use it

You have probably been told that 70% of wealthy families lose their wealth by the second generation and 90% by the third. It is a memorable line. It also does not hold up. As James Grubman documents in the International Family Offices Journal, the 70% is the arithmetic inverse of the roughly 30% second-generation continuity rate drawn from John Ward's 1987 study of 200 Illinois manufacturers. The 90% is a similar inversion, fused with the "shirtsleeves to shirtsleeves in three generations" proverb — already in print in America by 1874, and routinely misattributed to Andrew Carnegie. Roy Williams and Vic Preisser's Preparing Heirs (2003) did report that roughly 70% of wealth transitions failed, but it defined failure as assets involuntarily leaving the beneficiaries' control — broad enough to sweep in forced sales, litigation, taxes and market losses alongside overspending — and Grubman documents that much of its sample was solicited specifically from families that had already experienced a failed transition.

We raise this because the number is usually deployed to manufacture urgency, and the underlying concern is real enough that it does not need the help. What is actually well documented is more useful. In Bank of America Private Bank's 2024 study of 1,007 Americans with at least $3 million in investable assets, 69% of parents of adult children had discussed their wealth plans with those children — but on average only after the children had turned 31. A 2023 Merrill Center for Family Wealth study of families with $50 million or more found that 78% of those who had recently discussed family wealth said the conversation came up spontaneously rather than by plan, and 26% regretted it afterward.

That is the real failure mode. Not squandering. Late, unplanned, and unprepared.

Build responsibility before you disclose the balance sheet

Children learn to handle money by handling money, in amounts small enough that mistakes are affordable: a budget they actually control, a first job, a checking account they reconcile themselves, an investment account they watch fall and recover.

Funding an account for a teenager or young adult is a useful teaching tool, and it carries a tax constraint worth knowing. Under the "kiddie tax" rules, a child's unearned income above $2,700 in 2026 is generally taxed at the parents' marginal rate. It reaches children under 18, 18-year-olds whose earned income is not more than half their support, and full-time students aged 19 through 23 under the same test. Keep the teaching account modest enough that the lesson is about behavior rather than about a surprise tax bill.

Be deliberate about custodial accounts. A UTMA gift is irrevocable and vests indefeasibly in the child. The transferor selects the termination age within limits set by state law — the default is 21 in most states and 18 in some, with several permitting extension to 25 and one to 30 — and when the custodianship ends, the balance transfers to the beneficiary outright, whatever their circumstances at the time. Worth weighing against a 529 or a trust before it is funded rather than after.

Plan the conversation rather than letting it happen

Practitioners have recommended structured family meetings for decades. The honest caveat is that the evidence base is thin and largely correlational; we are not aware of controlled research showing that family meetings cause better outcomes. The survey data supports a narrower point — unplanned conversations go badly often enough to be worth avoiding.

A workable version is modest. Meet once or twice a year. Set an agenda in advance. Start with values and intent — what the money is for, what you hope it makes possible, what you expect of the people who receive it — before you get to figures. Introduce the professionals: the estate attorney, the CPA, the advisor. Say plainly who is named as trustee and executor, and why. Disclose amounts on your own timeline; leading with structure and intent rather than the balance sheet is a defensible middle path.

The point is not a single event. It is that when the difficult version of this conversation arrives, it is not the first one.

Hand over responsibility in increments

Family philanthropy is a useful low-stakes training ground. Give an adult child a defined amount from a donor-advised fund or family giving budget and let them research, decide, and report back. They practice diligence, tradeoffs, saying no, and defending a decision — with none of the stakes attached to the operating business or the core portfolio.

From there, escalate: bring them to a portfolio review, let them sit through the estate attorney's explanation of the structure they are in, give them a small allocation to manage alongside the professionals. Direct payments of tuition or medical expenses under the qualified-transfer rules sit outside the gift tax entirely — unlimited, and charged against neither your annual exclusion nor your lifetime exemption — provided the payment goes directly to the school or the provider. Reimbursing the student does not qualify, and "tuition" excludes room, board and books. A 529 works differently: contributions are completed gifts that use your annual exclusion, which is why the Code lets a donor spread a front-loaded contribution ratably over five years — $95,000 per beneficiary in 2026, or $190,000 for a married couple electing to split gifts.

Then build the structure to match

The 2026 environment removes much of the artificial deadline pressure. The federal gift and estate tax exemption is $15 million per person, it is no longer scheduled to revert at the end of 2025, and it is indexed for inflation beginning in 2027 — though Congress can change it, and state estate taxes still create real timing pressure in some states. The annual exclusion is $19,000 per recipient. For most families that changes the question from "how much can I move before the window closes" to "how much should this person receive, and when."

Three design questions are worth raising with your estate attorney:

Are incentive provisions worth their cost? Conditions tied to grades, matched earned income, or sobriety are appealing in concept and difficult in practice. ACTEC fellows and corporate trustees identify the same recurring problems: they can penalize a beneficiary with a learning disability, disregard a child who takes a lower-paying job for good reasons, and are hard for a trustee to verify. The common counsel is not to over-engineer them — they lock in the drafter's assumptions about a life that has not happened yet.

Would broad discretion with written guidance serve better? A fully discretionary trust paired with a clear statement of your intent — ideally embedded in the instrument itself rather than left to a side letter — gives a trustee room to respond to circumstances you cannot foresee. A separate letter of wishes is not binding, may be sought by beneficiaries in litigation, and in states that construe unambiguous trust language strictly will carry no weight against the instrument's own terms.

Do distributions at fixed ages serve the goal? Distributions at 25, 30 and 35 remain common and are increasingly questioned — not because heirs are immature, but because each outright distribution ends creditor protection, removes the structural barrier that keeps an inheritance from being commingled into marital property, forfeits the ability to sprinkle income among beneficiaries in lower brackets, and pulls the assets into the beneficiary's taxable estate. A trust the beneficiary eventually helps control, with an independent trustee holding distribution discretion, can preserve those protections while still transferring real authority — depending on state law and how the trust is drafted and administered.

Choose the trustee with the same care: corporate trustee, family member, or a split of roles with an independent distribution trustee. That choice shapes how every provision above actually operates.

Where we fit

TAGStone Capital works with families across generations: managing the portfolio, sitting in on the family meetings, and coordinating with estate counsel and CPAs so the plan and the people are ready at the same time. As a fee-only fiduciary, our only compensation comes from our clients.

Thinking about how to prepare your children for what you have built? Let's talk. Schedule a conversation