What Would the Rockefellers Do?

A Cautionary Tale About Wealth Preservation 

 I wonder now why I read this book. Perhaps the title – What Would the Rockefellers Do? – intrigued me. Perhaps I recognized the name of one of the authors (Michael Isom and Garrett Gunderson) as someone I might have done business with.

The bulk of the book is a pitch for “infinite banking” – an investment strategy based on buying whole life insurance from a mutual company. The idea is to maximize the benefits of life-insurance-based investing while minimizing the costs of the insurance itself.

The primary benefit of this (and all life-insurance-based investment strategies) is tax-deferred income. But investing through mutual companies has several added benefits. The most touted of these is that at a certain point you can borrow, say, $100,000 from the mutual company, invest it in a business or real estate deal (or anything else), and earn profits on that while still getting paid interest (4% to 5%) on the cash value of your account.

It sounds like double dipping, right? And that’s how it’s pitched.

But you have to pay for that borrowed money. The actual money you “make” while you have a loan outstanding will be the difference between how much you pay the mutual company for the loan (they charge a fee, though they downplay that when they sell the insurance to you) and the 4% to 5% that they guarantee to give you every year.

So if the cost of money is 2%, you are earning 2% to 3%. If the cost of money is 5%, you are earning nothing or negative 1%.

It’s not a bad strategy. But it’s not nearly as good as it’s made out to be. I recommend it as a part of a portfolio for young, unwealthy investors – not for anyone who is over 50 and/or wealthy.

A More Important Takeaway…

 If that’s all the book was about, I wouldn’t be talking about it here. But the first chapter tells a very engaging story that illustrates an approach to estate planning that you should seriously consider.

The story is a tale of two rich guys – John D. Rockefeller and Cornelius Vanderbilt.

Vanderbilt acquired his wealth in the early 1800s in the transportation business. (First ferrying goods and passengers around New York harbor and then building and running trains.)

Rockefeller made his fortune 50+ years later in the oil and gas business, starting and growing (with Henry Flagler) Standard Oil.

At his death in 1877, Vanderbilt was estimated to have been worth more than a hundred million dollars. More than the U.S. Treasury held at that time.

Rockefeller died in 1937 with a net worth of about $1.5 billion. Today, that would be about $340 billion. More than the fortunes of Gates, Buffett, Zuckerberg, and Bezos put together!

So what happened to all that money?

When Vanderbilt willed 95% of his fortune his son, William Henry, he told him to keep the money together and not distribute it among the other heirs. William Henry honored his father’s wishes and, as a result, managed to double the family fortune before he died in 1886.

But in writing his own will, William Henry forgot or ignored his father’s words and distributed his (and his father’s) fortune among his children. Having no larger or longer-term purpose for it, they spent it lavishly. And by 1947, most of the Vanderbilt money (in today’s dollars more than a billion) had been dissipated.

John D. Rockefeller thought it would be a bad idea to leave all his money to his children. Instead, he gave (during his lifetime) about a third of it – $530 million – to charity. In 1917, he left a good deal of the rest – some $460 million – to his son, John D. Rockefeller Jr.

Like William Henry Vanderbilt, John D. Jr. distributed his money among his children. But he didn’t give it to them directly. Instead, he created six individual trusts, all of them managed by a group of financial and legal professionals. (Known as the “family office.”) The core holding of the fortune stayed together since only a portion of the interest it produced was given to John D. Jr.’s kids.

Not all of the money was invested and spent wisely, but the trusts preserved a significant portion of it. And today, after six generations, the “family office” is still managing a fortune estimated at more than $10 billion.

Of course, there are now a lot more offspring to benefit from the interest. The last time I checked, more than 150 Rockefellers were receiving distributions. Still, the $10 billion remains intact. And it not only feeds the great grandchildren but provides $50 million per year of interest income that goes to charity.

The Lesson

People who have worked hard to accumulate a substantial amount of money naturally want to see it preserved in some way after they die. The lesson to be taken from the Rockefeller and Vanderbilt stories is that dividing your wealth among your direct descendants, which is what most people do, almost guarantees that it will disappear within two generations.

As it happens, I read this book just days before we had our annual family meeting – the one where we talk about money issues. The estate plan, the family limited partnership, the family charity, etc.

For a long time, K and I had been uncertain about what to do with the bulk of our estate after we are gone.

I had formed a family limited partnership about 20 years ago, and put various real estate properties into it as time went by. Today, K and I own only 2% of it. Our kids own the rest, but we have control over it till we die.

The kids at first made it clear that they didn’t want that money. They said we should leave it to charity. They didn’t even want the responsibility of running the partnership after we died. So we agreed on a compromise: The partnership would (1) support the family charities, and (2) serve as a private bank for the kids. (A bank that could make loans to them for business or other reasons, so long as the other board members approved.)

But what about our other assets?

We’re figuring that out now, but this book made one thing clear: If we want our wealth to last and have value over many generations, we must…

  • Keep it all together – not divide it up.
  • Put it in some sort of very conservative investment portfolio.
  • Create a written mandate for that portfolio that explains its purpose.
  • Mandate also that the yearly distribution of the money must be less than its yearly yield. (To ensure that the principal will always keep growing.)

I’m not sure that the above plan is perfect. But it’s a lot better than what I had before. So I’m grateful to the authors of What Would the Rockefellers Do? for giving me a clearer understanding of the risks in leaving money and an insight into how best to preserve and even grow it – for useful purposes – over time.