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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Just as a matter of interest, one of the Vanderbilt heirs gave most of his assets to the Communist Party and he never regretted it. Some he would have given, but couldn’t, was because it was in trust.
Different people have different values.
When it comes to winning the lottery, my fear is less about squandering the money than about getting hounded by scam artists or targeted for robbery or kidnapping. I want to research whether I can remain anonymous in my state or if I can set up a trust, and if so, what firms offer the relevant legal and accounting services. I will have a tangled web of anonymity. Once that’s set up, all I need to do is overcome the 1 in 300 million odds.
Thanks very much, Adam. I need to re-do my will due to my husband’s death two years ago and my unanticipated sole responsibility for my 16-year-old grandson, who came to live with us shortly before my husband’s death. Although I have adequate finances and a plan for his care should anything happen to me, your concise guidelines will help me clarify my longer term plans for equitable distribution of my estate to all my heirs. Thanks!
In my case, I have managed to “avoid the fate of the Vanderbilts”.
While I still maintain that I’d love to have to deal with these concerns firsthand (;-)), I do think the relevant point even for those without the need to deal with a lottery windfall is, “how do you exert influence (in this case, on subsequent generations) after you’re gone”? While I admit I share the same concern, I simultaneously admit that it has a certain amount of presumption that my experience is somehow good and/or better than that of future heirs, which I think isn’t a surety. So my fallback position is almost entirely based on values, where I hopefully can demonstrate, while I’m still around and kicking, what pursuits/goals/values I feel are worthwhile and worth investment of time/money/effort. Then ultimately it’s up to my kids (and their kids) if they choose to subscribe to same. I won’t be around to know or to judge.
The plan for a lottery winner is simple. Invest in US Treasury bills and bonds and don’t call back the financial advisers looking to invest that money. The whole point is that winning the lottery means winning the lottery. You have enough to live on for the rest of your life. Keep it simple and safe. Leave half to your family and the other half to a set of worthy causes. And take it in the form of an annuity.
Generally good points. There’s too much focus on staying rich and not enough on how to decumulation or balancing living and enjoying one’s wealth. In your scenario, you mention an estate of $10M and giving only $1M to each of two children instead of $5M. Then, what do you do with the other $8M. Put off enjoying your wealth and giving it to charity? And what if you don’t have any heirs? Seems for many, it’s the habit of saving/investing coupled with the fear of running out of money that drives people to keep accumulating…or at least avoid touching principal.
I don’t think an inheritance is likely to sap a child’s motivation for one reason. If the inheritance is passed at death, as it normally is, then the child is nearly at retirement age when they receive it, most of the time, because of the increased life expectancy with modern health care. Good or bad, they’ve already made most of their important life decisions without the influence of the money they had not yet received. I received a seven figure inheritance but I was 58 years old and already a multimillionaire based on my own income and investing. The inheritance barely made a blip on my radar. If I had received twenty million it still wouldn’t have changed my life. Only the rare cases of young adults receiving large inheritances are fraught with peril, I would posit. William Vanderbilt died at the age of 64, that doesn’t often happen any more, especially to the wealthy.
>> already a multimillionaire based on my own income and investing. The inheritance barely made a blip on my radar. If I had received twenty million it still wouldn’t have changed my life.
That’s the ideal case.
Money can insulate people from decisions they’d be better off making. IMO people focus too much on inheritance issues. Other people’s money, not knowing it’s value, etc. I always remember my own savings pile when I got to college. I didn’t squander it per se, but looking back if I’d not had that pile or looked at it the way I did –and yes I knew how hard I’d worked to make it– I’d have treated it as mostly not there and worked part-time to gain experience and discipline I didn’t have. I’d have graduated knowing what I wanted to do and with leftover money to get started. Even your own money can trip you up without enough experience to know how best to use it.
I don’t have any generalized supporting data, but I agree. When George Steinbrenner died in 2010 he left his below 50% ownership of the NY Yankees to his 2 sons. 12 years later the surviving son owns 70% of the $6B team, due to wise buy outs of other non-family part-owners. Neither son appears to have squandered anything.
LOL, you must be living in a privileged world where YOU had access to “modern health care” and people die of old age in their 90s and rich because that sure as heck isn’t the case for so many people in the USA.
And assumption that young foolish people would squander an inheritance compared to old wise people who would not is just bunk.
2 days in a row! You are a limitless trove of knowledge, Adam. Thank you, and keep up the good work.