Do you know how to build a legacy of wealth that will last 6 generations?
It’s a tall order to even fathom. Let alone attempt.
Who knows what “building a legacy” even means? It’s one of those esoteric ideals that we think we want but are not really sure how to execute.
Then, even if you are successful in generating financial wealth that endures beyond your lifetime, the question remains: How do you make sure your loved ones have the capacity to manage and care for the assets in perpetuity?
We all have heard stories of the spendthrift heir that blows all their inheritance and dies penniless.
It’s sad. It’s embarrassing. And it totally undermines the diligent effort it took to create the wealth in the first place.
What does it mean to build generational wealth?
Generational wealth is as it sounds, wealth that is transferred from one generation to another.
The “wealth” itself does not not have to be purely financial.
Wealth can take the form of family traditions, values, ideals, heirlooms and other tangible and intangible possessions.
Most often when people discuss generational wealth, they are talking about monetary resources (or a means of producing money) that can be passed down from one generation to the next.
Generational wealth is valuable because it gives the recieving generation a leg up. An opportunity to start further along and build from a strong starting point.
In an ideal context, generational wealth is what the American Dream is based off of. It is the fundamental idea that each generation should have more, do more and be privy to more than the one before them.
By definition, generational wealth is progress for the entire family.
Unfortunately, most wealth does not last…
The bad news is that generational wealth typically does not, in practice, endure for generations. We know how powerful it can be when wealth transfers but the statistics are not on our side.
70% of wealthy families lose their wealth by the second generation, and 90% by the third.
Most of the people that inherit money end up spending it or losing it. And if they don’t, their children will.
There are many wildly successful and wealthy people who spent their lives providing a better life for their family only to have it squandered or lost by their children or grandchildren.
Cornelius Vanderbilt, for example, built an empire of steamboats and railways valued at $100 million. Unfortunately, lavish spending and gambling decimated the fortune. The journalist and famed CNN anchor Anderson Cooper is a sixth-generation descendent of Vanderbilt. Cooper did not inherit any of the Vanderbilt fortunes.
George Huntington Hartford turned a small chain of retail, tea and coffee stores into America’s first grocery store chain that the Wall Street Journal once described as “Walmart before Walmart.” Until 1965 A&P was the biggest retailer in America. Huntington Hartford inherited the family fortune and a $1.5 million income per year and squandered most of it through failed businesses and a lavish lifestyle. After 156 years in business, A&P closed its final store in 2015.
Clint W. Murchison Sr rode the oil boom of the 1920s to create a Texas oil empire. His company became the Southern Union Gas Company in Dallas. The family fortune was worth over $250 million in the 1980s. His son, Clint W. Murchison Jr., inherited the family fortune, created the Dallas Cowboys football team, but largely eroded the family’s wealth in poor business ventures.
The Vanderbilt, Hartford and Murchinson stories are all too familiar. An enigmatic business person builds up a fortune and the children or grandchildren piss it all away.
Well, John D. Rockefeller wanted to make sure that didn’t happen to his heirs.
Who was John D. Rockefeller?
Mr. Rockefeller was America’s first billionaire. He is responsible for the distributed access to kerosene and many of the oil giants we know today.
Kerosene was a valuable source of fuel. It was the primary light source for homes before the invention of electricity. Rockefeller’s Standard Oil company controlled 90% of the USA at its height.
Mr. Rockefeller wasn’t just an oil magnate who built his empire on kerosene, he was also an excellent strategist for making sure that his vast fortune would stay in his family for generations.
For one, he used the government’s bureaucracy to his benefit. In 1911, the government ruled that Standard Oil was a monopoly. The company was ordered to break up into 34 smaller businesses.
Separating Standard Oil made Rockefeller the majority shareholder in a portfolio of businesses that catapulted his wealth even further.
The individual entities were worth more than the sum of the whole. He became the wealthiest man in America. His net worth was estimated to account for 2% of the American economy.
Rockefeller also used a combination of financial and legal products. In combination, the well structured estate effectively kept the family fortune together and growing. The estate bypasses the lifespan of each individual to create a completely separate entity that each individual benefits from but does not wholly control.
The ‘Rockefeller Method’ of estate planning combines Life insurance, an irrevocable trust and a well-crafted Family Constitution.
Here’s the high level of how the Rockefeller estate plan works:
The family forms a trust to hold their assets and document how they wish for their wealth to be passed on in each subsequent generation.
The trust owns and is the beneficiary of a life insurance policy on each of the family members. When each person passes, the proceeds of their policies are payable to the trust. And so it goes from generation to generation. Over time, the trust is well-funded with these proceeds and can afford the premium payments on each new family member.
The originators of the trust determine how the proceeds can be spent and under what circumstances they may be distributed to the heirs.
It should be noted that unless your assets are such that you have an estate tax issue (US $15M+ net worth) then an irrevocable trust may not be appropriate.
A revocable trust offers fewer protections during life but may be better suited for lower levels of wealth.
Regardless of the trust instrument used, families that implement this structure are not trying to leave a huge pile of money for reckless spending. Instead, this strategy requires careful planning to create incentives for how recipients of trust dividends should arrange their affairs.
Building a Legacy that Lasts Six Generations…
The Rockefeller plan is just one example of how to arrange your affairs for longevity. The problem is that most people do not want to think about death or make proper provisions for it.
To build a legacy takes planning and foresight. With a diligent, concerted effort you can build a powerhouse for your family.
It’s not about how much money you have, it’s about what you do with what you have.
How do I build generational wealth?
If you want to follow in Rockefeller’s footsteps and build generational wealth, realize that it is possible. You just have to take a counter-cultural approach.
The Rockefellers, Kennedys, Marriotts, and Hiltons are old money families that you can learn from.
Creating a legacy is a framework and system for ensuring that your wishes are carried out and that your family benefits from the hard work you put in every day.
It’s sad when a person leaves an inheritance that the children squander or do not adequately honor the person who worked so hard to create a life for them.
The practical components of making generational wealth a reality are:
- Life insurance
- A will
- A trust
Life insurance is for when you want to leave more money that you already have to your loved ones. It’s a way to create liquidity when there may not be any.
A will determines where you’d like your assets to go.
A trust is a legal entity that, when funded, owns assets that are not tied to the lifespan of any one individual but can benefit numerous people.
Here are some simple steps to take to create your legacy:
- Start small. Establish a savings account to hold your emergency fund and begin building your nest egg.
- Teach your children about money and financial literacy. A lack of understanding about money and how to manage it is perhaps the largest contributor to lost wealth.
- Start a business or other means of producing wealth.
- Invest in income-producing assets – namely real estate.
- Take asset protection seriously. Having a will is not enough.
If you want to build wealth that that you can pass on to the next generation, real estate investing is a proven path to follow.
The Housing Joint Venture flagship real estate investing course the Real Estate Investing Bootcamp is an excellent way to get started. This premier 8-week online course will walk you, A to Z, through everything you need to know to build a large, profitable portfolio of investment properties. Read this page for all the details.