Rags to Riches to Rags: The Importance of a Wealth Transfer Strategy
Topic: Wealth Planning
May 30, 2017
Image used with permission: iStock/DNY59
Rags to Riches to Rags: The Importance of a Wealth Transfer Strategy
I’ve always had a fascination with New York City. If I had to choose my favourite part of its history, it would be the Gilded Age. So when I picked up a copy of Arthur T. Vanderbilt II’s book, "Fortune’s Children: The Fall of the House of Vanderbilt", I knew within seconds I wouldn’t be able to put it down.
The Vanderbilts were once the wealthiest family in not only America, but, for a period of time, the world. The family’s name is most famous for the fortune Cornelius Vanderbilt (aka the Commodore) made in steamships and railroads in the 1800s.
Before his death, the Commodore thought he had it figured out. “I have a large family and none of them were brought up to do anything. If they have it as I left it to them, they can live on the interest and they will all have plenty for as long as they live.” When he died in 1877 he left $100 million to his heirs – more money than was held in the United States Treasury at the time. His last words to William H. Vanderbilt, the son he bequeathed the vast majority of the estate to, were “Keep the money together.”
It didn’t quite turn out the way the Commodore had intended. Although William H. managed to double his inheritance and his own family’s net worth over the 8 years following his father’s death, during the subsequent decades, the Vanderbilt descendants squandered the fortune of one of America’s greatest families. They threw lavish parties, and built opulent mansions, country houses and yachts. At one point, the Vanderbilts had constructed 10 mansions on Fifth Avenue, and had commissioned country estates to rival the chateaus of European aristocracy. The names are familiar: Biltmore, The Breakers, Marble House, Florham. The family’s story is rich with all the tawdry elements of a drugstore novel: treachery, conspiracy, bribery, paranormal obsession, avarice, jealousy, gambling, prostitution and suicide.
“Within thirty years after the death of Commodore Vanderbilt in 1877, no member of his family was among the richest people in the United States… Forty-eight years after his death, one of his direct descendants died penniless… and… when 120 of the Commodore’s descendants gathered at Vanderbilt University in 1973 for the first family reunion, there was not a millionaire among them.” And what of the 10 mansions that once lined Fifth Avenue, the original having been completed only in 1883? “The first was demolished in 1914, and by 1947 every one had been broken to rubble.”
“Any fool can make a fortune. It takes a man of brains to hold onto it after it is made.” – Commodore Vanderbilt
Wealth transfer is a hot topic, and becoming increasingly important as we are on the cusp of the largest transfer of generational wealth in U.S. history. Thirty trillion dollars, currently in the hands of the wealthiest generation ever, the Baby Boomers, is getting ready to be passed on to their Gen X and Millennial children.1
There is no single factor that led to the Fall of the House of Vanderbilt, rather quite a few. The Commodore and William H. thought they had prepared the path for their heirs. However, what they did not do is prepare their heirs for the path. Implementing basic wealth transfer strategies – as in the following examples – can help a family follow in the footsteps of the Rothschilds, Mellons and Rockefellers and not down the road to financial ruin like the Vanderbilts.
Have the dialogue.
As eight of the Commodore’s ten children were girls (much to his disappointment), money was not discussed and no wealth management knowledge was imparted. William H. was not allowed to participate in the Commodore’s businesses until he was 43, and even then, the Commodore made all the decisions until the day he died.
Involving beneficiaries in financial discussions is key to family wealth management. It is important for the heads of a household to be on the same page as it relates to their style of managing family finances, and it’s important for children to feel comfortable talking about money. Borrowing from Nexus’s 2015 blog entitled Financial Literacy for Kids, “… we need to remove the taboo. Starting early can help prepare children to deal with potentially harmful social influences to which they are exposed in everyday life and to start building the connection between money and meaning.”
Get the messaging right.
Actions speak louder than words, and if your children are hearing you ‘talk the talk’ but not ‘walk the walk’, you are sending them mixed signals of what money means to you, and what wealth should mean to them. In fact, the absence of conversations about money is itself sending a money message – that it is taboo and secretive.
William H. grew up as the son of a penny-pinching autocrat, and married a soft-spoken daughter of a clergyman. His son Willie, however, married quite the opposite – a spendthrift named Alva, famous for her lavish costume parties which are credited with breaking the Vanderbilts into New York high society. After this marriage, “neither Willie nor the Vanderbilt family would ever be the same again.” What ensued was a history of familial one-upmanship beyond comparison. The message that money is to be spent not saved would end up destroying them all.
Establish family values.
Too often, families of wealth get caught up in the technicalities of managing it, and do not take the time to think about what it means to them. Values can be measurable and concrete, such as education, economic independence or philanthropy, or more intangible qualities such as ambition, modesty or high ethical standards.
Examining the values that were passed on in the Vanderbilt legacy shines a light on the beginning of the end. For the Commodore, “it was the money itself. The money. It was money madness, greed. The money was the basis of his self-esteem, it was his tally of his wins, of his success, of his self-worth, and there would never be enough to satisfy him.”
So much value did the Commodore place on the name of the family and his own honor that his son Corneel never learned to live within his means. He stole, borrowed, gambled and committed fraud to keep up appearances, but he never learned financial independence. After the settlement of the estate – and being awarded a small but comfortable inheritance – Corneel travelled in great style once around the world and then killed himself.
Understand family dynamics.
Are your heirs equipped with the financial sophistication and emotional maturity they will need to manage their inheritance, and eventually pass that skillset on to their descendants? Are they even interested? Understanding this sooner rather than later will help you craft your wealth transfer plan and decide whether you cultivate within the family, or arm them with trusted advisors who will guide them along the way. And always be mindful that wealth transfer plans are just as dynamic as the people involved. Revisit regularly and remember, you actually can control beyond the grave. Just about anything can be put in a will. Recall those words that the Commodore uttered to William H. as he lay on his death bed – “Keep the money together.” If they had actually been written in his will, this sad story might very well have had a different ending.
No one wants their descendants to feel like Willie did: “Inherited wealth is a real handicap to happiness. It is as certain a death to ambition as cocaine is to morality.” And you certainly don’t have to be as rich as the Rockefellers to care about wealth transfer. You’ve either worked hard to build your net worth, or you inherited your money. A wealth transfer plan will allow you to make thoughtful financial decisions within the context of your own money philosophy, your family’s values and a long-term view. The trifecta of a good wealth transfer strategy includes lawyers, accountants and financial planners. If you have concerns about your family’s legacy, come and talk to your financial counsellors at Nexus.