The Secret of Perpetual Wealth

Rich families seldom stay rich: "Shirtsleeves to shirtsleeves in three generations." Taxes, ill-advised speculations, spendthrift heirs — all take their toll. What's more, Oliver Wendell Holmes pointed out back in 1860, "it is in the nature of large fortunes to diminish rapidly when subdivided and distributed .

 . . . "[A great fortune] splits into four handsome properties; each of these into four good inheritances; these, again, into scanty competences for four ancient maidens . . . ." 

 Holmes acknowledges one exception: a group whose fortunes seemed never to diminish. A "harmless, inoffensive, untitled aristocracy" he calls them: The Boston Brahmins. But although Holmes babbles on about good breeding and such, he never discloses their secret. What "special means" did these Brahmin families employ to remain permanently in the upper crust? Surely there was more to it than going to Harvard. 

 There was. The "secret" was so open it became embedded in New England folklore, remembered (though seldom practiced) well into the 20th century. 

 Ready to learn the secret of perpetual wealth? Return with us now to those golden days of yesteryear. Boston, before the Civil War. Out from Harvard Yard strides a brand new graduate . . . . 

 Meet Waldo 

Waldo, the new grad, has only one regret. His mother did not live to see him get his diploma. With her untimely death Waldo has become beneficiary of a family trust fund. He recently received his first year's income, $3,000. (Perhaps $80,000 or more in today's dollars.) What's Waldo going to do with all that money? What any right-thinking new college grad would do: Spend it! 

 Off goes Waldo on a grand tour of Europe: London, Edinburgh, Paris, Rome . . . . We catch up with him in Florence. Ah, Firenze!

Strolling from the Ponte Vecchio toward the Pitti Palace, Waldo is startled to see a familiar figure advancing toward him — his aunt Josepha, with a teenage girl in tow.

 "Land sakes!" his aunt exclaims. "Look, Emily, it's my favorite nephew. "Waldo, you remember my goddaughter, don't you?" 

 Waldo doesn't. But he will never forget her. Emily is the comeliest, sunniest, most enchanting creature Waldo has ever laid eyes upon.

 

* * *

Waldo returns to Boston determined to get serious. He rents cheap lodgings near Beacon Hill, finds a job and resolves to woo and one day wed the enchanting Emily. 

 Waldo lives on his scant earnings. His trust income he saves. All of it! No income tax in those days. In a few years, interest on the accumulating income payments augments Waldo's earnings sufficiently for him to start wooing Emily in earnest. 

 We're happy to report that Waldo does get the girl. But here we'll leave his personal life to focus on his finances: Waldo continues to bank his trust income checks, year after year. By the time he attends his 25th Harvard reunion, his accumulated trust income has grown into a personal fortune equal to his trust principal. You could say he has cloned his wealth. So now you know the secret of perpetual wealth. The Boston Brahmins, it was said, were so frugal they lived on the income from their income.

* * *

They sure don't make Trust Fund Babies like they used to.

Should Wealth be Perpetual?

In 19th-century New England, the secret of perpetual wealth was to live way, way below your means. The 21st-century secret of perpetual wealth is a dynasty trust. These trusts, designed to preserve family wealth in perpetuity, pose a "pernicious problem," writes Ray D. Madoff in America Builds an Aristocracy.

Related posts:
Return of the Dead Hand
The Secret of Perpetual Wealth

"The Secret of Wealth"

For no good reason (maybe Siri's looking for a more luxurious lifestyle) my iPad presented me with the results of searching this blog for "the secret of wealth." The posts are worth revisiting. You can read them here.

For those considering dynasty trusts as well as the rest of us, the "secret" is clear: Families can enjoy lasting wealth only if it's replenished from time to time.

How Long Can a Perpetual Trust Last?

How many descendants of your great-great-great-grandparents do you know? Half? A handful? A few? (Personally, I've never met most of my first cousins.)

As more states ease or discard the rule against perpetuities, family trusts are being set up to last for a thousand years or even "forever." Doesn't that stretch the definition of family to the breaking point?

Yes, according to Lawrence W. Waggoner of the University of Michigan Law School.

"Trusts intended to operate for as many as a thousand years or even in perpetuity, typically for the benefit of the settlor’s descendants living from time to time, now and in the future, are all the rage in banking and some estate planning circles," Waggoner writes. In From Here to Eternity, the Folly of Perpetual Trusts, he does the math showing the absurd consequences.

 He shouldn't worry. As life beneficiaries of a "perpetual" trust proliferate from generation to generation, the value of what each beneficiary receives will dwindle, eventually prompting the trust to distribute the few crumbs remaining and terminate. Centuries ago this inevitability was explained by Oliver Wendell Holmes: A great fortune will split "into four handsome properties; each of these into four good inheritances; these, again, into scanty competences…."

Perpetual trusts cannot generate perpetual wealth for heirs whose number multiplies with each generation. In Holmes' day New Englanders knew as much. The secret of perpetual wealth is that each generation must rebuild that wealth.

Cross Selling at Bank of America

Megabanks want customers to use more of their financial products and services. They emphasize cross selling (to a fault, in the case of Wells Fargo).

Why then would a big bank go out of its way to trash its reputation and stink up its brand?

Latest example, Bank of America and a couple who were unfortunate enough to have the bank buy their new mortgage, which they hoped to modify.

For torturing the couple, Bank of America has been fined $45 million by Judge Christopher Klein of the U.S. Bankruptcy Court. His decision begins like this:

Franz Kafka in 1910

Franz Kafka lives. This automatic stay violation case reveals that he works at Bank of America. 

The mirage of promised mortgage modification lured the plaintiff debtors into a kafkaesque nightmare of stay-violation foreclosure and unlawful detainer, tardy foreclosure rescission kept secret for months, home looted while the debtors were dispossessed, emotional distress, lost income, apparent heart attack, suicide attempt, and post-traumatic stress disorder, for all of which Bank of America disclaims responsibility.

The Great Recession triggered the couple's woes. Most likely they'll recover their financial footing and return to prosperity, and one day a Merrill Lynch broker from Bank of America may ask for their wealth management business.

Will they welcome him with open arms?

Or will they pick up sticks and  beat him like a piñata?

Can a Rich Family Stay Rich?

Judging from this item from yesterday's New York Times, not every rich family goes from shirtsleeves to shirtsleeves in three generations:

Herbert Gowen, 52, of Belmont, Mass., is part of a family whose fortune began with a steamship company in the 1800s. Although family members now number more than 90 and are dispersed around the country, the family still wants to retain its hallmark values of “prudent financial conservatism, entrepreneurial creativity and philanthropy,” Mr. Gowen says. He says his siblings and cousins work hard to impart these values to their children, who are nicknamed “generation fivers” because they are of the fifth generation, beginning with the man who started their fortune.

The Gowens must have had some good trust officers over the years. Either that, or they are the last New England clan to remember The Secret of Perpetual Wealth.

The Billionaire Who Gave It All Away. Really!

A number of billionaires have pledged to give their fortunes away, but you know they'll go on living the lush life. 

Not Chuck Feeney, who now lives in a rented San Francisco apartment and is said to own one pair of shoes. Remarkably, reports The Guardian, this billionaire has actually given almost all of it away.

Chuck Feeney has achieved his lifetime ambition: giving away his $8bn fortune while he is still around to see the impact it has made.

For the past 38 years, Feeney, an Irish American who made billions from a duty-free shopping empire, has been making endowments to charities and universities across the world with the goal of “striving for zero … to give it all away”.

This week Feeney, 89, achieved his goal. The Atlantic Philanthropies, the foundation he set up in secret in 1982 and transferred almost all of his wealth to, has finally run out of money.

The head of Feeney's foundation said his boss had once tried to live a life of luxury but it didn’t suit him. “He had nice places [homes] and nice things. He tried it on and it wasn’t for him."  

The Lawyer Who Wrote Novels in Court

Like J. D. Salinger, wills and estates lawyer Louis Auchincloss lived ninety years and more. Unlike the reclusive Salinger, Auchincloss, who died Tuesday night, never stopped writing – novels, stories, biography and more – even as he continued to wrestle with trusts and codicils. “I think my secret is to use bits and fractions of time. I trained myself to do that. Anybody can do it. I could write sitting in surrogate’s court …."

In his novels Auchincloss sketched a vanishing world of privilege, a world of prep schools, town houses and the use and misuse of wealth.

Except, he said, that world did not vanish after all:

“I grew up in the 1920s and 1930s in a nouveau riche world, where money was spent wildly, and I’m still living in one!,” [Auchincloss] told The Financial Times in 2007. “The private schools are all jammed with long waiting lists; the clubs — all the old clubs — are jammed with long waiting lists today; the harbors are clogged with yachts; there has never been a more material society than the one we live in today.”

When Income Was Income And Principal Was Sacrosanct

Mary Ann Glendon, as quoted in Felix Salmon's column on philanthropy:

Bostonians still tell the story of the respectable society matron who was crossing the Common one day and ran into an old college chum she hadn't seen for years. The matron was dismayed to see that her friend was obviously engaged in the world's oldest profession. "My dear," she said, "whatever has happened to you?" "Well," said her friend, "it was either this or dip into capital."

Related post: The Secret of Perpetual Wealth