Michael Isom
Michael Isom is the founder of Vault AIS Financial Services, a wealth-planning company based in St. George, Utah. He is coauthor of What Would the Rockefellers Do? How the Wealthy Get and Stay That Way—and How You Can Too. VaultAIS.com
Two families. Two fortunes. Two very different futures.
A century ago, the Vanderbilts and the Rockefellers amassed astounding wealth. Cornelius Vanderbilt made his money in shipping and railroads. When he died in 1877, he left an estate worth more than a quarter of a trillion dollars in today’s dollars… . John D. Rockefeller, who made his money in oil, left an estate worth slightly more than that when he died in 1937.
Those fortunes should have been more than enough to assure both families’ wealth long into the future. But the Vanderbilt fortune may soon be largely gone. One direct descendant of Cornelius Vanderbilt was essentially broke when he died just 48 years after his famed ancestor. The Rockefellers, on the other hand, have remained wealthy. Their family wealth still exceeds $10 billion, with billions more in their charitable foundations.
If leaving a lasting legacy is among your financial goals, here are five things you can learn from the Rockefellers to preserve your wealth…
John D. Rockefeller, Jr.—son of the man who founded the family fortune—didn’t leave the family’s tremendous wealth to his children. Instead, he had trusts created for each of those kids and left most of his estate to those trusts. Properly constructed trusts can protect an estate from many major external wealth threats, keeping assets in the family even if heirs divorce, are sued or declare bankruptcy.
Trusts also can protect estates against a major internal wealth threat—that a spendthrift heir could burn though the money, leaving nothing for future financial emergencies or later generations. Helpful: If one of your goals is to protect against spendthrift heirs, language should be included in the trust that directs trustees to distribute assets to heirs only for specific approved uses—these could include education or health-care expenses. Or you could instruct them to distribute only a small percentage of trust holdings each year…and/or to distribute assets only to heirs who meet specific conditions, such as graduating from college or holding down jobs.
Unlike the Vanderbilts, the Rockefellers didn’t divvy up their assets among numerous heirs. Most of the money remained in trusts that were under the control of a single “family office” run by financial professionals for the benefit of the heirs. That centralization and professional oversight of assets further reduced the odds that heirs would mismanage or fritter away the family fortune. Six generations later, the Rockefeller family office is still in operation.
Most families can’t afford to employ a full-time team of financial professionals to manage their affairs. But you can look for trustworthy financial advisors, including an insurance agent, planning attorney, CPA, etc. You can arrange for those advisors to coordinate their efforts to ensure they’re all on the same page and each provides a degree of oversight on the others. You also can ensure that these advisors continue working with the family even after the death of the older generation.
Trusts established by the family’s oldest living generation can take out whole life insurance policies on the lives of their grandkids, ideally soon after each grandchild is born. That way, if an heir borrows money from the trust but isn’t able to pay it back, it’s not detrimental to the survival of the trust.
These life insurance policies are extremely tax-efficient—their payouts usually are tax-free, and their accumulated cash value is tax-deferred. Ownership of each insurance policy is eventually transferred to the grandchild whose life is insured, removing the policy from the grandparent’s taxable estate. Even families of far more modest wealth than the Rockefellers should be concerned about estate taxes these days, since the federal estate and gift tax exemption is slated to drop sharply after 2025.
In addition to their potential tax savings, these insurance policies help descendants avoid high interest payments—policyholders can borrow against the cash value of the policies, generally at interest rates significantly lower than that of other available loans. Warning: Use plain-vanilla whole life insurance if you pursue this strategy, not more complex and riskier insurance products such as indexed universal life, which promise impressive returns but can fall well short of projections.
One of the best ways to improve the odds that your heirs will use your estate in a manner consistent with your values is to regularly gather your family together to discuss those values. According to a 2016 interview, the Rockefellers hold “family forums” twice a year, during which family members age 21 and older discuss their projects, their accomplishments and their thoughts about the family’s direction. These meetings reinforce what it means to be a Rockefeller and help maintain unity despite the fact that the family company, Standard Oil, hasn’t existed in more than a century. Meetings of this sort can continue long after the family member who starts the tradition passes away, creating a legacy that goes deeper than the financial assets left behind. Helpful: The book Riveted: 44 Values that Change the World by David York and Andrew Howell is a wonderful tool for thinking through the values you wish to impart to your family.
Who will inherit your assets? How and when will those assets be received? Such topics are typically treated as an unpleasant chore—no one wants to think about his/her own mortality. That’s a missed opportunity—evaluating these issues should be given extended attention and treated as a source of great meaning.
The assets that you spent your life accumulating could improve the lives of the people you care most about. Whether you expect to leave millions to your heirs or a more modest figure, the inheritance might help ease heirs’ financial worries or help them discover purpose in their own lives, perhaps by financing the launch of a business or paying college costs. Providing this for the people you care about should be among the great accomplishments of your life—and the more time you spend carefully considering these matters, the greater the benefits both you and your heirs are likely to derive from it. Should your heirs simply receive an inheritance to use as they see fit? Should they have access to the assets only for specific uses or when they reach a specific age? Making well-thought-out choices appropriate for your heirs will help shape your legacy—these aren’t decisions to make on the spur of the moment while sitting in your estate-planning attorney’s office.
Helpful: Leaving money to heirs isn’t the only option—John D. Rockefeller gave hundreds of millions of dollars to charity, and the family’s charitable foundations continue to make tens of millions of dollars of donations each year. Gifts to good causes can provide a tremendous sense of meaning and purpose. But which nonprofits are best aligned with your beliefs? This, too, is something to give careful thought.
