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Staying Rich

Adam M. Grossman

WHEN HE DIED IN 1877, Cornelius “Commodore” Vanderbilt was by far the wealthiest American, with a fortune of $100 million. In the 10 years after his death, his son William succeeded in further doubling those assets. It was an astonishing level of wealth. But that’s precisely when things began to turn.

One of Cornelius’s grandsons built the 125,000-square-foot Breakers mansion in Newport. Another commissioned Biltmore in North Carolina, which is still the largest home in America. And, of course, the family endowed Vanderbilt University. The result: Just 50 years after Cornelius’s death, the family’s wealth was essentially gone.

Just as lottery winners and professional athletes often end up cursed by their own wealth, so too were the Vanderbilts. Receiving a windfall, it turns out, can be a double-edged sword, no matter how large it is. If you’ve received a windfall—or are planning to leave one to your heirs—below are six recommendations to help avoid the fate of the Vanderbilts.

1. Sketch a plan. A common piece of advice for those receiving a windfall: Avoid taking action too quickly. That’s a good recommendation, but I think it’s also incomplete. It doesn’t tell you when it’s safe to take action or what to do.

That’s why I would start by sketching out a plan—with the emphasis on sketching. It’s difficult to formulate the right plan on the first try. It takes time, and there’s no way to force it. Instead, the only way to zero in on the plan that’ll work best for you is to begin with some incremental actions. If you’re thinking of making gifts to charity or to family, for example, start with just a few small gifts. Whatever you have in mind, see if there’s a way to take some half-steps. This will allow you to see what works and what doesn’t, and then adjust.

2. Avoid illiquidity. If your windfall somehow hits the news, you’ll inevitably receive calls from folks suggesting investment opportunities. But as noted above, you’ll want to take it slowly. Just as important, you’ll want to avoid getting tied up in anything too illiquid. I wouldn’t jump with both feet into anything. I would be especially wary of real estate deals, angel investments and private funds—anything that will make it difficult for you to withdraw your funds if you decide to reverse course.

3. Think in terms of buckets. If you’ve ever visited Biltmore or the Breakers, it’s easy to see how the Vanderbilts lost their fortune. Even the wealthiest families can only build so many mansions before they run into trouble. In fairness, though, it isn’t just the Vanderbilts. This same issue affects many windfall recipients. Give a small child just $50, in fact, and he’s likely to fall into the same trap. Whenever someone receives an amount of money that’s multiples of what they had before, it presents a real challenge—because, at first, anything and everything seem affordable.

That’s why I suggest segmenting money. Maybe you want to pay off your mortgage or purchase a new home. Or maybe you want to set aside funds for your children’s or grandchildren’s educations. Or perhaps you want to treat part of your windfall like an endowment, to provide ongoing support. However you choose to use your funds, the most important thing is to establish an overall allocation. That way, your windfall won’t appear like a bottomless resource.

4. Avoid complexity. Suppose your portfolio grew by a factor of 10 or even 100. Should it look any different? Of course, it will be larger, but should the investments you choose be any different than before? This is a question I hear a lot. People wonder whether they should be looking at more “sophisticated” investments.​ But in my opinion, the answer is no.

A larger portfolio does allow for more flexibility. All things being equal, if you want to tie up funds in a real estate project or in an angel investment, that’s going to be easier with a larger portfolio. But a larger portfolio doesn’t necessarily need to be more complex. When I design seven- and eight-figure portfolios, I do it with precisely the same index funds that I use for smaller portfolios.

5. Avoid reflexive planning. For better or worse, the standard estate planning toolbox tends to focus mostly on the estate tax. That’s for good reason. Many families want to move as much of their wealth as possible to their children. With a top federal rate of 40%, who wouldn’t want to minimize the estate tax? In fact, for very high net worth families, it’s worth virtually any amount of legal and accounting fees to implement tax-saving strategies, such as the use of irrevocable trusts.

But that isn’t the only answer. Before going down the road of bequeathing as much as possible to the next generation, I suggest taking a step back. Consider what would be best for your heirs. Warren Buffett is often quoted on this topic. He’s said that he wants to leave his children “enough to do anything, but not so much that they can do nothing.” That, I think, is the key. We’ve probably all met folks who received too much from their parents and, as a result, appear lacking in motivation.

That’s why it’s worth considering alternative formulations. One would be to leave your children something, but not everything. Suppose your net worth is $10 million and you have two children. Instead of leaving $5 million to each child—easily enough to sap a young person’s motivation—you might leave just $1 million.

And with the funds you do leave, you could place restrictions on their use. You might stipulate that the money be used only for specific purposes, such as a home or education. While there are no guarantees, provisions like this can increase the odds your bequest helps build long-term stability for your heirs.

Another way to structure a bequest is to tie it to specific ages or stages. That can make sense. Ultimately, these choices will be specific to your family and will probably change over time. What’s most important, though, is to be intentional with your choices. What I recommend is to give thought to what you ideally would want before walking into an estate planner’s office.

6. Avoid ostentatious displays. This last point might seem obvious. Going straight to the Ferrari dealership isn’t the most fiscally prudent move. But that’s not the only reason to avoid big purchases. The other reason is because such spending can attract attention. Especially in the initial weeks and months, a key goal is to keep your financial situation under the radar. That will give you the space and time to make the sort of incremental decisions outlined above—without input from those who may not have your best interests in mind.

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles.

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