DANGER: RICHES AHEAD – WHAT YOUR MONEY MAY DO TO YOUR CHILD
Virgina Woolf thought that an independent woman needed a modest private income and a room of her own. Emma Duncan asks present-day heirs and experts about inherited wealth, and finds that they set the bar a bit higher …
From INTELLIGENT LIFE magazine, September 2007
“I found out just after my 21st birthday,” says Emily. “I was called into a room full of men in suits, and told…” A couple of decades on, Emily is still uncomfortable enough with the subject of money to trail off before she gets to the end of her sentence.
Emily (not her real name) is the daughter of an old British industrial family, brought up in a baronial hall in the north of England. There were plenty of bedrooms and a certain number of servants, but in England they do not necessarily go with a lot of disposable cash; so the news that she was worth many millions of pounds came to her as a shock. How did she feel? “Surprised. A bit pleased. Embarrassed. Awkward. Not really knowing what was expected of me. I think I had a hangover at the time.”
She and her siblings have reacted differently to their money. She has spent some of her life pretending it was not there-working as a modestly paid professional, living in Africa-and some of it trying to spend it well by patronising the arts. One of her brothers treats his wealth as a responsibility and a burden, determined to increase it, and infuriated by governments that try to take it away from him. The other has fun with his. But whatever their differences, they have one thing in common that sets them apart from the rest of humanity: inherited wealth.
A great deal is written about the pursuit of money. The business of disposing of it is less thoroughly explored. It is, of course, the staple of property and fashion supplements; but there is a limit to the number of beach-houses that one man can own, and to the number of pairs of Manolo Blahniks one woman can wear. Beyond that, there is philanthropy, and the children.
The boom in philanthropy is enthusiastically documented. Foundations are proliferating on both sides of the Atlantic and many of the beneficiaries of the shift in income from labour to capital have, out of benevolence or self-aggrandisement, turned large slices of their loot over to charity. Even so, if history is any guide, the vast majority of disposable wealth held by today’s rich will go not to the poor children of Africa, but to the already exceedingly prosperous children of America and Europe.
And the quantity of money likely to be handed over is mounting. Researchers at Boston College’s Centre on Wealth and Philanthropy calculated in 1999 that ageing Americans would transfer around $41 trillion by 2050. Most legacies are small. According to a study for the Federal Reserve Bank of Cleveland in 2003, only 1.6% of America’s population has inherited more than $100,000. But given wealth that has swamped America and, to a lesser extent, Europe in the past decade, the rich stand to leave ever larger numbers of ever larger legacies.
Anecdote suggests that this may not be altogether a good thing. The Kennedys, the Agnellis, the Rothschilds have all had their casualties, and this year Paris Hilton has been doing her bit to bolster the stereotype of the troubled rich kid-but then anecdote is bound to. Stories of happy, well-adjusted scions of grand families do not gain much currency in the gossip columns.
You are probably familiar with some of them-even though you may not know it, because many of them are quiet about the extent of their wealth and the ways in which it has helped them lead better lives. If you do know them, you may not accord them the respect they deserve for being apparently normal. Unusual wealth puts unusual pressures on people.
As far as the rich are concerned, Tolstoy was wrong: according to those who work with the wealthy, lots of rich families are unhappy in the same way. “Often”, says, Caroline Garnham, a partner at Lawrence Graham, a London law firm, “there’s a man with a fierce entrepreneurial streak. The children get emotionally battered and don’t feel good enough.” Ian Partridge of Lodestar, a Geneva-based company that advises rich people on family issues, echoes this. “They are nearly always exceptional people, but not always exceptional parents.”
Many highly successful people, say the advisers, expect their children to be successful in the same way that they were. “You really have to beat it into them that they got rich partly out of luck,” says Deborah Kay, a partner at Goulston Storrs, a Boston law firm. “People don’t become extravagantly wealthy just because they work hard. If they did, there would be many more very rich people in the world. A lot of the challenge for me is to take the bullshit out of the conversation about the children-telling the parents that the chances of the children making this sort of money are remote.”
Yet too many parents, it seems, struggle to accept that being a good teacher or a good father is as valid as being a good businessman. So, very often, do the children, with the result that they may spend miserable decades in the family business, unable to admit their unhappiness to their parents. Tony Weller, a psychotherapist who specialises in working with the very rich, speaks of “the conflict between the duty to oneself-to fulfil one’s own giftedness-and the duty to the family, which is often compounded by a controlling patriarch or matriarch pulling the strings.”
Successful parents tend not to be at home much. Which is fine if the other parent is both at home and sensible-but history suggests that rich men have a tendency to marry trophy wives, not all of whom are devoted mothers. Unless people are prepared to spend time with their children, they may find that their children grow up with values that are different to theirs. That’s what happened to Emily: “I was brought up by a nanny who happened to be a Maoist. I think that’s why I’ve always had a bit of a disjuncture with my wealth.”
Legacies can damage sibling relationships too. “I’ve seen women in tears”, says Garnham, “because they can’t get their children in the same room.” Conflict seems to be particularly rife when the wealth is inherited in the form of a family business, rather than just as cash. And that type of conflict may become increasingly common, as primogeniture fades in the Western world. “You get the son and daughter both wanting to be chief executive,” says Rick Riebesell, a corporate counsel who has worked on family issues for many years. “It’s happening more and more. It’s a powder keg.”
Economics is troubled by the urge to bequeath. According to the life-cycle hypothesis, people should “dissave” (econospeak for borrowing or spending savings) when they are young and earning little, save when they are middle-aged, and “dissave” once more when they are old and of no use to the labour market. On their deathbed they should be as broke as the day they were born. But life, as so often, stubbornly refuses to obey theory. People actually save a lot more when they are earning than they spend when they are old, so (on average) leave a lot behind them when they depart from this world. Economists have been forced to concede what everybody knows-that most people have a “bequest motive”. Empirical studies support the idea. Around 70% of those questioned say they want to leave some money behind.
Why? That question matters because if you want to know how much you should leave your children you first need to know why you want to leave it.
Economists have identified four sorts of bequest motive: accidental, egoistic, strategic and altruistic. The accidental one is the least interesting. A variation on the life-cycle hypothesis, it suggests that people save more than they need in order to insure against the possibility that they may live to be indigent centenarians. Since most people don’t, most people die leaving some of that cash-hence the accidental bequest.
The testator driven by the egoistic motive is an Ozymandias, determined to leave a dynasty as others might a monument. The impetus may manifest itself in giving lots of money to the family. However, the aim is not the wellbeing of the offspring but the immortality of the parent.
Yet the egotistic testator who seeks to found a wealthy dynasty may find his ambitions frustrated (though, since he won’t be there, it may not matter much). The families that preserve their wealth over the generations are rarities. The notion that the first generation makes it, the second husbands it and the third spends it is so widespread that it probably reflects reality. As Peter Leach, a partner at BDO Stoy Hayward, an accountancy firm, and head of its family business centre, points out, “clogs to clogs in three generations”–a northern English saying–has its equivalent in many other languages: Erwerben, Vererben, Verderben (earn it, bequeath it, burn it) in Germany; “from the stables to the stars and back in three generations” in Italy; “from sandals to sandals in three generations” in China.
There are ways of protecting the cash to some extent against the children. “The English aristocracy”, says Guy Paterson of the family investment office of Unigestion, an institutional asset-management company, “has made good use of the trust structure to protect its assets and its power.” Gerald Grosvenor, the 6th Duke of Westminster, is still 3rd on the Sunday Times Rich List, 330 years after his ancestor, Sir Thomas Grosvenor, sensibly married an heiress with 500 acres of land on what were then the outskirts of London. The vast property empire in what is now Mayfair and Belgravia is owned by trusts.
But the egotistic testator should probably leave as little as possible to the children. Stick to statues-or their modern-day equivalent, charitable foundations. Institutions are more reliable than people, and less inclined to spend their money on slow horses and fast women.
The strategic bequest is perhaps commoner than testators would like to admit to themselves. Its purpose is to get something-usually attention-in exchange for the legacy. King Lear is literature’s clearest example of the strategic testator:
Tell me, my daughters,
(Since now we will divest us both of rule,
Interest of territory, cares of state),
Which of you shall we say doth love us most,
That we our largest bounty may extend
Where nature doth with merit challenge.
He is also a fine illustration of how to mismanage intergenerational wealth transfer. By handing over the cash before he has croaked, Lear loses his leverage, his kingdom and his wits in swift succession, and is left wandering a wild moor, battered by a storm, tormented by a jester, and cursing a couple of his children-a situation that, landscape, weather and Fool aside, other strategic testators risk if they fail to set up a satisfactory incentive structure.
Testators with greater managerial talents than Lear, however, may find the strategic approach fruitful. That, at least, is the conclusion of research in 1985 by a trio of academics from Stanford, MIT and Harvard that included Larry Summers, later secretary of the Treasury. They found a strong positive correlation between parents’ bequeathable wealth-wealth other than annuities, in other words-and the number of visits children paid parents. Wealth held as annuities did not seem to generate visits. This finding appeared to sustain the notion that filial love is tainted by greed-as did their discovery that the relationship between wealth and visits is stronger in families with more than one child. The researchers postulate that children are rightly pretty confident that parents are going to leave their cash to their offspring, so the single child is unlikely to lose his inheritance by ignoring his parents, whereas the child with siblings risks seeing his birthright handed over to his more attentive sister.
So how much should strategic testators pass on to their children? Lear’s experience argues that they would be daft to hand much over during their lifetime. And logic suggests that they should be free to leave nothing thereafter. Strategic testators evidently take a somewhat cynical view of their children; so they may as well dangle a fat legacy in front of them, bask in the warm sunshine of their attention and secretly blow the lot in Las Vegas. As the great British essayist William Hazlitt wrote, “the art of will-making lies chiefly in baffling the importunity of expectation.”
Which leaves the most interesting motive, the altruistic one. Most of us feel we are driven by it, and at first sight it looks easy enough. We love our children, so we leave them what we can. It seems the only decent thing to do. Happiness and money, at least up to a moderately high level, do seem to be reasonably well correlated. According to research by the Pew Research Centre, a quarter of Americans with incomes under $30,000 said they were very happy, while half of those with incomes above $100,000 did.
Yet altruism may be the hardest motive to fulfill. Doing good to ourselves is difficult enough, given the imperfect relationship between what we think we want and what makes us happy; doing good to other people is harder still, given our imperfect knowledge of what goes on inside their heads. Although data about the very rich is sparse, one of the few studies of their happiness looked at a group of people on the Fortune 400 list and a group of Masai herders from East Africa and found that they were about as happy as each other. Many of those in the industry doubt that extreme wealth brings happiness. “Do you know many happy billionaires?” asks Bernard Sabrier, of Unigestion, of his colleague Guy Paterson, in an interview. Paterson shakes his head somberly.
For Sigrid Rausing, one of Britain’s richest women, inheriting a large fortune seemed almost like something to be overcome. “The pros of inheriting great wealth, I believe, are largely illusory and can become pathological-an illusory sense of being special and different, the assumption that one is interesting to other people only, or mainly, because of the money, and subsequent feelings of isolation…I strongly believe that becoming engaged philanthropically is the only way of making sense of great wealth.”
The Rausing money came from her father, one of two Swedish brothers who scattered Tetra Pak drinks cartons across the world. Her family moved to Britain in the early 1970s and she went to boarding school in Oxford. It became Britain’s most wealthy family after her father sold his half of the business to his brother. She has lived with her inheritance for as long as she can remember. “It seems always to have been there,” she says.
Isolation, Rausing suggests, can be a problem for the rich. “We live in a society which largely determines value by money-therefore, if you have either much less than the average, or much more than the average, you are, by definition, a minority. Coming from a background of wealth can be isolating for children and teenagers, who tend to want to be like everyone else.” Rausing always did summer jobs, partly because she believed in the value of work, but partly because she wanted to share the experience of work with her friends.
Rausing now gives large amounts of money away, focusing on human rights. A couple of years ago, she bought Granta, the literary magazine. Her philanthropy is a big operation, with full-time staff and serious budget.
Inheritance on the Rausing scale has some grand detractors. Karl Marx and Warren Buffett have both argued that it is bad for society, even though their views about how society should work diverge. But Buffett, unlike Marx, is also concerned for the welfare of the children of the rich. He likens inheritance to choosing the Olympic team from the children of Olympians-which wouldn’t be much fun either for the untalented team or for its country.
Buffett is not alone among great American capitalists to take this view. As early as 1889, Andrew Carnegie declared,
There are instances of millionaires’ sons unspoiled by wealth who, being rich, still perform great services in the community. Such are the very salt of the earth, as valuable as, unfortunately, they are rare; still, it is not the exception, but the rule, that men must regard, and, looking at the usual result of enormous sums conferred upon legatees, the thoughtful man must shortly say, “I would as soon leave my son a curse as the almighty dollar,” and admit to himself that it is not the welfare of the children, but family pride, which inspires these enormous legacies.
“The Carnegie Conjecture”, a 1992 paper by Douglas Holtz-Eakin, David Joulfaian and Harvey Rosen, found some truth in Carnegie’s claim that “the parent who leaves his son enormous wealth, generally deadens the talents and energies of the son, and tempts him to lead a less useful and less worthy life than he otherwise would.” The study looked at a group of people who had inherited money. Of those who inherited $25,000 ($37,000 today), only 5% were out of the labour force within three years, whereas a fifth of those who inherited $100,000 were. And although more than half of those who had inherited up to $25,000 and were out of the labour force when they received their legacy were back at work three years later, only 16% of those who had inherited $100,000 or more went back. Inheritors who go on working seem to earn less than their peers do. Thomas Stanley and William Danko, authors of “The Millionaire Next Door” found that, on average, children who received money from their parents were worth four-fifths as much as those in their profession who did not receive cash.
Wealth thus leaves parents in what economists call the Samaritan’s Dilemma. They want to make things better for their children; but by improving their children’s lives in the short term, they undermine their ability to look after themselves in the long run.
If inheritance discourages work and decreases incomes, it is not surprising. Most people have the fear of poverty to force them out of bed on dark mornings, to drive them to make the difficult phone call that they long not to make, to push them on through the doldrums that becalm all careers at some point. But those who have inherited money, and even those who know it is eventually coming their way, have to make do without that extra incentive and find the necessary drive within themselves. It’s particularly hard for people in their 20s-a difficult stage in everybody’s life, when most people don’t really know what they want to do, and nobody wants to take their phone calls. And those who fail to establish themselves in a profession in their 20s may find it much harder to later on in life.
Emily, of the industrialist family, understands this. She used to work as a curator, and is a painter, and a good one, but has not made a career of it. “If the money hadn’t been there, I’d have put it before everything else. I’d have pushed the creativity.” Emily has carved out a place for herself in life, spending her money on promoting the arts.
The problem lies not just in the obvious disasters-the drunks, the drug-addicts and the suicides-whose stories reach the gossip columns. It’s also that the idle rich can seem slightly lost. Earning money itself can be a source of self-esteem. Look, the householder can say, observing his big pad, his smart car and his well-educated children: I did that. Those figures correlating happiness and wealth do not reveal whether earned money brings more satisfaction than inherited cash; but it’s a fair bet that it does. And it is through work-unpleasant and boring though it may be at times-that people find out what they are good at, hone their skills and forge their identities. Money may be the spur that drives most people to work; but once their careers are up and running, they tend to gain much more from the job than just cash.
What’s more, those who already have money are deprived of the opportunity to aspire to it, as Weller, the psychotherapist, points out. “The rich”, he says, “end up losing hope. The poorer person has the hope of becoming wealthy-and then they’ll be happy. The rich already have wealth, so they’ve nothing left to hope for. I’m doing a lot of work with the children of rock stars, and I’m getting a lot of lack of ambition. There’s no drive. There’s hopelessness. And then there’s guilt: we have so much, what right have we got to be unhappy?”
Relationships with the non-rich can be a problem. “These people are prey,” says Mary Duke, head of wealth-advisory services at HSBC. “They’re constantly being pitched, sold, everybody’s after them.” They may, as a consequence, withdraw.
Rausing doesn’t think the money has got in the way of her relationships, though she concedes that she may be less trusting than she otherwise would have been. “People who are obsessed with money, and who therefore try to get close to people with money are themselves often intensely vulnerable…Money in their minds trumps love, respect and intimacy, and they will therefore almost invariably become disappointed and bitter when they find that money, after all, can do relatively little for one’s sense of happiness and contentment.”
Emily says she can identify three romances that died because of her money. “People run away from it. They don’t want to be seen as gold-diggers. It’s a responsibility to marry somebody with money.” Other suitors suffer from fewer scruples. “I know so many heiresses who’ve had three or four husbands. They’ve been paid off one after the other,” says Weller. It’s not a new problem. As John Dryden observed in the 17th century, “All heiresses are beautiful.”
Inheritance can improve relationships as well as damaging them, perhaps because money can help rub the sharp edges off life. Richer people can, of course, buy more expensive things; and more expensive things are by and large more beautiful, more comfortable or better-tasting. More money makes life more pleasant. That may help explain why the divorce rate is lower among the rich than the poor. Merryn Somerset Webb, editor of MoneyWeek and author of “Love is Not Enough: A Smart Woman’s Guide to Making (& Keeping) Money”, says that while she knows several people whose lives have been ruined by inheritance, she also knows plenty whose lives have been greatly improved by it. The best-off, she reckons, are those who have inherited money but stuck it out in employment. “They live the same life that I do, but a better life.”
David Goodhart, a former Financial Times journalist, inherited a million dollars or so, which allowed him to found Prospect, a highbrow current-affairs magazine. “The money has done its duty. It allowed me to start an enterprise.” He is probably poorer than he would have been if he had stuck with salaried employment and left his inheritance in the bank; but intellectual debate in Britain is richer.
Goodhart is the embodiment of Buffett’s much-quoted dictum that you should leave your children enough to do anything, but not enough to do nothing. “The really great thing about inherited wealth,” says Alex Scott, whose family sold an insurance company in 1994, and who now runs Sand Aire, a multi-family office which invests his family’s money as well as others’, “is that it frees you up to do things you wouldn’t otherwise have done. I wish I’d realised that when I was 16.”
A cushion of inherited cash allows people to opt for careers-typically, in the arts, academia, social work or NGOs-that they might otherwise have spurned in favour of a job with a cushier lifestyle. The inheritance allows them to follow their heart without sacrificing their comfort. Alternatively, the cushion may lie there, unspent, as security. “I’m risk-averse,” says Richard, a scientist with an inherited million discreetly in the background. “The money has enabled me to take career risks that I wouldn’t otherwise have taken.” He lives modestly; he has no car; he holidays in a cottage in Wales without electricity; luxuries do not interest him. “The ultimate luxury is the knowledge that money doesn’t matter.”
Others use their inheritances to subsidise start-ups. Johnnie Boden got an unexpected legacy at just the right moment. “I was 27. I’d tried every job in the City and realised that I was no good at any of them. I made a lot of mistakes with some of it. But at the same time I met a girl who became my wife, who told me to get on with it.” He got on with using it to build a mail-order clothing business that he founded in 1991 and which now employs 700 people. According to Somerset Webb, he is the rule, not the exception: “the great majority of entrepreneurs we write about have some money somewhere behind them.”
Virginia Woolf offers the strongest defence of inheritance as a fuel for intellectual and artistic creativity in her short book, “A Room of One’s Own”. It is based on two lectures given at Cambridge University. She had been asked to speak about women’s fiction, but the book is mostly about money. In order to write, she said, a woman needed £500 (£20,500 today) a year and a room of her own. She knew this from experience.
My aunt, Mary Beton, I must tell you, died by a fall from her horse when she was riding out to take the air in Bombay…I found that she had left me five hundred pounds a year for ever…Before that I had made my living by cadging odd jobs from newspapers, by reporting a donkey show here or a wedding there; I had earned a few pounds by addressing envelopes, reading to old ladies, making artificial flowers, teaching the alphabet to small children in a kindergarten. Such were the chief occupations that were open to women before 1918. I need not, I am afraid, describe in any detail the hardness of the work, for you know perhaps women who have done it; nor the difficulty of living on the money when it was earned, for you may have tried. But what still remains with me as a worse infliction than either was the poison of fear and bitterness which those days bred in me. To begin with, always to be doing work that one did not wish to do, and to do it like a slave, flattering and fawning, not always necessarily perhaps, but it seemed necessary and the stakes were too great to run risks; and then the thought of that one gift which it was death to hide-a small one but dear to the possessor-perishing and with it my self, my soul-all this became like a rust eating away the bloom of the spring, destroying the tree at its heart. However, as I say, my aunt died; and whenever I change a ten-shilling note a little of that rust and corrosion is rubbed off; fear and bitterness go…My aunt’s legacy unveiled the sky to me.