I recently ran into a friend of mine who runs a property management company. He related to me a sad story of one of his recently deceased clients – a former surgeon who had hired my friend and his company to manage a portfolio of multifamily properties the surgeon, who was now a widow, had amassed during his lifetime.
When the surgeon hired my friend, it was about a year before his death. At the time, the surgeon had expressed his desire for my friend to whip his neglected properties into top shape and maximum efficiency to pass them on to his two children. Sadly, these children were estranged from their widowed father and didn’t even know about the existence of these properties.
My friend did his job by whipping the portfolio of properties into shape and boosting the values of the portfolio by 50%, from $6M to $9M. This kind surgeon passed away in May, leaving his entire $10M estate, which included the rental properties, to his surviving son and daughter. The two children did not strike my friend as financially responsible. They confirmed his suspicions when, instead of holding onto the properties for passive income, they quickly directed the trust to sell the properties so they could pocket the proceeds. The properties were sold for less than what they could have commanded because of the impatience of the children and their desire to pocket money quickly. My friend predicts the children will be broke within five years.
The surgeon loved his children even though they didn’t care to have a relationship with him. He left them a significant financial legacy that could have set them up for life. However, the financial legacy will prove insufficient as his children will eventually blow through their inheritances. Although a financial legacy is important in caring for the needs of one’s heirs, there is another type of legacy equally valuable to the long-term financial viability of those heirs. This other type of legacy is knowledge. Without investment and financial knowledge, money will eventually run dry, like many financially unsophisticated lottery winners who lose their fortunes in short periods.
Two of the most prominent families in American history illustrate the importance of passing on a legacy of financial knowledge and sophistication. On the one hand, you have the Rockefellers, whose fortune still endures. On the other, you have the Vanderbilts, who completely squandered their fortunes within two generations.
Here are their stories:
At the peak of his wealth, Cornelius Vanderbilt was worth $202 billion in today’s dollars. Vanderbilt amassed his fortune from his steamship and railway empire. The Vanderbilts were once the wealthiest family in the United States, but over the generations, the family squandered it all on expensive luxuries like classical art, mansions, parties, and gambling. CNN anchor Anderson Cooper is Vanderbilt’s sixth-generation descendent, and he says his mother told him early on, “There’s no trust fund.” In other words, the money’s all gone.
John D. Rockefeller, the progenitor of the Rockefeller fortune, did things differently than the Vanderbilts. First, he passed his investment knowledge and financial sophistication onto his heirs to ensure the preservation of the family fortune for future generations and charitable causes. In addition to passing on a legacy of investing sophistication to his heirs, Rockefeller also instituted measures to protect the family legacy in his trust. He did this by putting much of the financial decision-making over his fortune in the hands of the children who took his advice and in the hands of trust administrators who would ensure the family’s lasting legacy – mainly through cash-flowing real estate, including the World Trade Center and Rockefeller Center at one time.
MONEY IS NOT ENOUGH
Leaving a multi-generational legacy requires two parts: capital and knowledge. Leaving capital with heirs without the necessary financial literacy will likely end up with your fortune being squandered like the Vanderbilts. You can’t just hope your heirs to know how to build and preserve wealth; you have to guide them, and here are some of the important lessons you can leave them.
The wealthy don’t speculate. They don’t invest with emotions, and they don’t leave their fortunes to chance. They rely on data, numbers, and fundamentals to distinguish good investments from bad.
FOCUS ON PASSIVE INCOME
The wealthy understand that wealth is key to having money working for you 24-7. Because there are only certain hours in the day, there is only so much income you can earn from your day job. Only passive income investments can build wealth. That’s because these investments will make you money even when you sleep, and unlike the number of jobs you can hold, you are not limited to the number of income streams you can create and hold.
For generating cash flow, smart investors gravitate towards income-producing tangible assets that generate recession-resistant cash flow, which can be reinvested to generate multiple streams of passive income for generations to come.
ALTERNATIVE ASSETS ARE THE KEY
Those who successfully build generational wealth are focused on assets that produce income, grow over time, and are backed by a tangible asset. Assets such as income-producing businesses, natural resources, land, and commercial real estate are prime examples.
Why do ultra-wealthy investors favor these assets?
Because these are the types of assets that can create passive income 24-7. Cash flow and profits from these assets can then be used to acquire more of the same productive assets to create exponential income streams. For example, a real estate investor who converts a building and land into rentable space can parlay that cash flow to acquire more properties with rentable space.
WHAT TYPE OF LEGACY WILL YOU LEAVE?
Do you want to leave a financial legacy that only lasts five years? Or do you want to leave one that has the potential to last perpetually?
If the latter, then don’t forget to pass your investment knowledge onto your heirs, not just your fortune.
Kyle Jones is a co-founder and Key Principal of TruePoint Capital, LLC. Kyle is responsible for the company’s strategic planning, investment decisions, asset management, and overseeing all aspects of the company’s financial activities, operations, and investor relations.
Kyle obtained a Bachelor of Science degree from Texas State University – San Marcos, where he also played Division 1 Baseball.