How To Protect And Grow Your Generational Wealth

What is generational wealth?

Simply speaking, it’s a family’s financial wealth that gets transferred from one generation to future ones. 

Is wealth difficult to preserve in a family?

Studies have estimated that 70% of wealthy families will lose their wealth by the second generation and 90% by the third generation.  

Wealth is difficult to create; it’s more difficult to preserve.  There are many successful entrepreneurs who spent years enslaved by their business, building it through courage, hard work and grit.  Through failures and successes, the founder’s sheer determination willed the business to survive and eventually to thrive.  It took a generation or more to build wealth to where it is now.  The challenge is whether this is repeatable with the next generation.  Will they take over the existing business and devote as much energy, resolve, bravery, and humility, and take it to the next level of success?  If the business is sold and they inherit the proceeds, what will they do with the large sum of money?  Will they spend it?  Will they invest it intelligently and prudently?  Will they start an enterprise of their own?

Will wealth be preserved, grown, or lost?

While it is difficult for the matriarch or patriarch of the family who built wealth to manage the next generation, it is even more difficult for them to ensure their legacy is preserved for multiple generations.

There are two primary erosion factors that contribute to the destruction of generational wealth:

Psychological Erosion and Mathematical Erosion

1. Psychological Erosion

This type of erosion is caused by personal attitudes and decisions:


Often inheritors think of their pool of wealth as being too big to be depleted.  They make poor lifestyle decisions, spending to sustain lavish habits.  These inheritors typically spend more than those who created the wealth in the first place.

Poor decision making

Some will attempt to replicate their ancestor’s success by starting businesses or investing in entrepreneurial opportunities.  Many of these businesses risk failure. 

Lack of effort

Sometimes the worst gift someone can receive is a dollar not earned.  Receiving too much money can change an individual’s character.  A significant change often observed is the development of a sense of entitlement – and the disappearance of effort. 

Too much conservatism

There are those who will simply be fixated on not losing the money they have inherited.  While these individuals may be able to preserve the wealth for a while, eventually, they will start to lose assets due to mathematical erosion factors.

2. Mathematical Erosion

This type of erosion is caused by external, economic factors:


Wealth dilutes exponentially from generation to generation. If, for example, each family member has two children, $100 million will become $12.5 million split amongst eight family members by the fourth generation.  If each family member has an average of three children, that same $100 million becomes $3.7 million by the fourth generation.  This example assumes nothing is spent or lost along the way and that it is split equally among the beneficiaries.


Capital growth and income are taxed in Canada.  There are ways to defer taxes and ways to minimize taxes.  But taxes will eventually play a role in reducing the assets.  There are also estate administration taxes that need to be considered.


As the cost of goods continues to increase, the value of wealth needs to grow at an after-tax rate that is higher than inflation.  If not, over time, the value of wealth will decrease in real dollars.  $100 today is not as valuable as $100 was twenty years ago.  The value of the dollar will continue to be reduced in future years due to inflation.

So how do families successfully transfer wealth to the next generation?

Here are some strategies that wealthy families can employ.

Family trusts (or inter-vivos) can be a useful way to protect wealth.  By concentrating the decision-making in the hands of trustees, families can protect generational wealth from many psychological erosion factors that exist at the individual level.  However, most trusts will eventually wind up and be disbursed among a large number of beneficiaries.  Trusts, when properly structured, can be very effective tools, but they are not fail proof and still may be exposed to mathematical erosion factors.

Life insurance is another effective tool that is often overlooked, which can be used to preserve and even magnify wealth for future generations.  For example, incorporated business owners will use policies to help them shelter excess cash and minimize large tax consequences at death by taking advantage of the corporation’s capital dividend account.

Testamentary trusts can direct the eventual management of estate proceeds, ensuring that the wishes of the deceased are passed on and a true legacy is created.

There are many tools and strategies available to help protect inheritances from psychological or mathematical erosion factors.  To be effective, legacies need to be deliberately planned.  Wealthy families will want to plan early to ensure their wealth is truly generational.

At Tall Oak Private Wealth, we help families grow and preserve their generational wealth.  Reach out to us today to get your plan started by clicking here.

This material is provided for general information and is subject to change without notice. Although every effort has been made to compile this material from reliable sources; no warranty can be made as to its accuracy or completeness, and we assume no responsibility for any reliance upon it. Before acting on any of the above, please contact Tall Oak Private Wealth of Raymond James Ltd., for individual financial advice based on your personal circumstances. Raymond James Ltd. – Member – Canadian Investor Protection Fund. Insurance offered through Raymond James Financial Planning Ltd., not a member – Canadian Investor Protection Fund.

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