Who owns the money anyway?
Recently, this cunning university called Facebook was abuzz with a questionable article that questioned the amount of financial assistance a person’s “whole family” was entitled to if a person “suddenly became a billionaire”. As expected, there were many starting points. However, it seemed to me that people were postulating answers from a point of raw emotion rather than a real understanding of finance.
Just to be clear, nobody usually “suddenly” becomes a billionaire. The first is a one-of-a-kind fantasy that only favors a handful of people who are likely to become mega-rich by playing the lottery; even then, as was the case in Chicago, Illinois earlier this summer, where a lottery winner scooped the $1.28 billion Mega Millions jackpot. He walked away a millionaire, not a billionaire, as the figure would be drastically reduced by taxes. The odds of winning were approximately 1 in 303 million. By an article in Forbes magazine, that lower cash value would be further reduced by IRS law, as well as more state and federal taxes, leaving the winner with about $430 million, making him a millionaire, not a billionaire. I know this is just a technicality, but you understand.
The truth is, winning the lottery can never be an effective strategy for building wealth. The odds of that happening are just not in favor of the average person. Nor will the magical thought of a wealthy benefactor leave you with a life-changing sum. Because while the odds of that happening are better than winning the lottery, the fact is that that too is still a long term for the majority of people. Too many people are willing to sit back and dream of their life circumstances being changed by the possibility, the mere chance, really, that they might one day “suddenly” become rich.
Money doesn’t just fall from the sky, and building a foundation of lasting wealth isn’t an overnight undertaking. For the majority of people, it takes hard work, sacrifice, and financial agility. Even trust fund babies and descendants of the 1% who have inherited their wealth amassed through the hard work of their ancestors will see their wealth eaten away if they don’t manage their finances properly. I know I’ve said this in previous articles, but it’s a fitting reminder that wealth is often lost by the third generation.
In the 1990s, the Rockefeller family, whose name is synonymous with unimaginable wealth, began to worry that their future generations would not be able to enjoy the family’s vaunted wealth and the influence derived from the interest earned on billions of dollars of investments, over many years. So they launched an aggressive campaign to bolster their fortunes, initially from oil, to rebuild their legendary wealth, then estimated at around $5-10 billion, by making large private investments in Asia, Latin America and Europe. . Why? Because they understood that money, even large sums, will disappear if not properly managed. Which was certainly what their family had begun to experience as members of successive generations began to shatter the family fortune more and more.
Bringing us back to the above Facebook Publish. What is at the heart of all this, in my opinion at least, is: what is the responsibility of someone towards his loved ones in the event that he earns a little money through wise investments? Unfortunately, history has shown that there’s no such thing as “the whole family” to make a significant dent in amassed fortune. Again, the old saying goes that wealth is often made and lost in three generations.
According to a New York Times In a February 16, 1992, article titled “Rockefeller family tries to keep vast fortune from dissipating,” the new approach to maintaining their wealth involved, among other things, creating “a structure that could provide a guidance, sophisticated advice, and an option for family members as they prepared for the 21st century,” as their wealth was diluted by children and their children’s children.
There is also an important emphasis on philanthropy, the thinking being: to whom we give a lot, we expect a lot. Family members are expected to be involved in charities and foundations, making giving the center of the family’s identity. Make no mistake about it, charity is often part of a well thought out and effective tax structure.
There aren’t many people with money like the Rockefellers, who defied odds and lasted seven generations. But if they understand that boundaries have to be drawn when it comes to generational wealth, isn’t that a lesson for middle and upper-tier investors today? This is called fiscal responsibility. Receiving all assistance needs from family members is simply unwise. Invariably what happens is that the money will be spent on trivia and the same people will come back for you to find out more. Better to teach a man to fish. The hard truth is that reaping successful investments doesn’t automatically qualify you to be some kind of Santa responsible for everyone’s livelihood. (Even Santa only gives presents to nice kids, not naughty ones!)
The prerogative of building a generational heritage is to provide assets that will be passed on to your family; that is, your children and grandchildren. You don’t have to financially allow long-lost relatives and “old friends” any substantial gains you might make. Of course, that doesn’t mean you can’t help a loved one in need, or even an organization; In fact, I encourage paying your blessings. But it’s really discretionary and not mandatory.
Lamar Harris Vice President, Wealth Management, NCB Capital Markets