When Cornelius “Commodore” Vanderbilt died in 1877, he was by far the wealthiest American, with a fortune of $100 million. And in the ten years after Vanderbilt’s 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 fifty 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. 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 to those receiving a windfall is to 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 how to do it.
That’s why I would start by sketching out a plan—with emphasis on sketching. Especially in the beginning, it’s very difficult to formulate the perfect 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 will 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, then adjust course.
2. Avoid illiquidity. If your windfall somehow hits the news, you’ll inevitably receive calls from folks suggesting investment opportunities. As noted above, though, you’ll want to take it slow. Just as importantly, you’ll want to avoid getting tied up in anything too illiquid. I wouldn’t jump with both feet into anything. But I would be especially wary of jumping into real estate deals, angel investments or 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 wasn’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 is multiples of what they had before, it presents a real challenge, which is that anything and everything seem affordable at first.
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 allocate your funds, the most important thing is to apply structure. 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 from 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. However, a larger portfolio doesn’t necessarily need to be more complex. When I build 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. And with a top rate of 40%, who wouldn’t want to minimize this 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 irrevocable trusts.
But that isn’t the only answer. Before going 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 issue. 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 its 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 also 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 moves like that can attract attention. And certainly in the initial stages, a key goal is to keep your financial situation under the radar. That will give you the space and the time to make the sorts of incremental decisions outlined above without the input of those who may not have your best interest in mind.