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Secrets from the Rockefellers: How They’ve Protected Their Wealth for Generations

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The Rockefeller name has been a prestigious image of wealth, power and business in American history. Other names that would rival it include Walton, Ford, Mars and S.C. Johnson. And they’ve all managed to keep their billion dollar clans intact for generations.

Wealth Eroding Factors: Gift and Estate Taxes

One of the biggest wealth eroding factors can be estate and gift taxes that you will incur at the time of your death. Luckily, as of 2016, the Estate, Gift and Generation Skipping Transfer (GST) tax exemptions are $5.45 million per individual and $10.9 million for married couples. This means you can leave a minimum of $5.45 million and a maximum of $10.9 million (if married) to your heirs and pay no federal estate or gift tax.

What’s that? You’re in the clear because this won’t affect you? Well, great. But that doesn’t mean you don’t need to protect your wealth now and at the time of your death. Even fortunes worth far less than $5.45 million are still substantial sums of money.

How do you know that your assets will be distributed according to your wishes? How do you ensure that your estate will avoid the costs of probate? How do you protect your wealth from divorce, creditors and the like now and when it’s passed to your beneficiaries? How do you pass your wealth to your beneficiaries without them incurring large income taxes? These are all important factors to consider.

Protecting Your Legacy

Regardless of where you fall on the wealth-o-meter, the wealthy have three important estate planning goals:

1. Maintain satisfactory streams of income.

2. Protect their wealth from creditors forever.

3.Keep their money outside of the wealth transfer system.

Dynasty Trusts

For the ultra-wealthy (i.e. Rockefeller status) a fourth goal may be preserving their wealth for generations, far beyond their death. This is the core function of a Dynasty Trust.

Dynasty Trusts allow you to fund up to the amount of the exemption ($5.45 or $10.9 million) into the trust. These types of trusts allow the assets to be gifted to heirs who are more than one generation younger than the Grantor (creator of the trust), free of tax. This is a key function of Dynasty Trusts, because they protect your wealth against the GST tax. Leaving part of your legacy to those more than one generation younger than you is effectively “skipping” a generation in the government’s eyes. Because of this, there are special regulations that can cause you to get hit the hardest with taxes in these instances if your wealth isn’t properly protected.

Initially, the Rule of Perpetuities limited Dynasty Trusts to a maximum period of 21 years after the death of the last identifiable beneficiary living at the time the trust was created. So, if you set up a Dynasty Trust today and have a 2-year old grandchild, the trust would remain in effect until 21 years after their death. So, even with the rule in effect, this trust could easily remain in-force for 100 years. However, if done properly, Dynasty Trusts can last indefinitely. Many states have done away with the rule, allowing these trusts to essentially go on auto-pilot. The Grantor can also opt to extend the time period with verbiage in the trust that amends the rule. Either way, the value of your trust, and its appreciation, will pass to your descendants over multiple generations free from estate, gift and income taxes.

Revocable Living Trusts

A Revocable Living Trust is very ideal for the rest of us mortals who may not reach or exceed the $5.45 million exemption, but still want to protect our wealth and accomplish those three important goals.

First, “Revocable” means that you retain the right during your lifetime to amend, change, revoke or terminate the trust at your discretion. Second, “Living Trust” means that the trust is created while you’re alive, and goes into effect at the time of your death.

There are many benefits associated with a Revocable Living Trust, the first being its ability to avoid probate. Probate can get costly rather quickly, and are extra costs that exist in addition to any gift or estate taxes. If Uncle Sam can’t get you there, he can get you here. It can also become a drawn out, time consuming process. Rather than putting your loved ones through the time, stress and expense of probate, this trust can keep your estate out of probate. Also, many probate records are open to the public, so a trust ensures maximum privacy for your family. The amount of your estate and your beneficiaries are not public knowledge.

Another key element is that all your assets are coordinated according to one set of instructions – your wishes for how you want your legacy to be distributed. The inheritance also passes to your beneficiaries free from estate, gift and even federal income taxes. Assets that are owned by the trust protect both you and beneficiaries from creditors, spouses, divorce and future death taxes.

Why Does It Matter to You?

To fully appreciate the core benefit of any trust, understand this – estate and gift taxes hit every generational level. If your wealth isn’t properly protected, your legacy may only last a generation or two, simply because of tax erosion and nothing else. Whether through a Dynasty Trust or Revocable Living Trust, you can avoid these losses by keeping your wealth outside of the wealth transfer system. It also maintains substantial income for your heirs, whether it be for education, business opportunities, healthcare or general living purposes. Limiting the control of your beneficiaries means that their inheritance from the trust remains protected from a multitude of threats, including creditors and divorce, because it remains outside of their estate.

Both Dynasty and Revocable Living Trusts are excellent strategies for creating a structure around a family legacy, depending what your most important goals are along with your net worth.

3 Dangers of Ignoring Your True Cost of Living

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Understanding your true cost of living is one of the most commonly overlooked concepts. That’s because traditional planning does little to examine lost opportunity costs, much less offset them. But how can you reach your full financial potential when you don’t attempt to overcome one of the biggest wealth eroding factors you’ll encounter?

Lost Opportunity Cost

First, you have to understand just what I mean when I say “lost opportunity cost.” In relation to finance, it represents the actual amount of money you lose when making a financial decision. A great way to illustrate this is by using David Bach’s Latte Factor®.

Let’s say that every week-day morning you stop and buy a Venti Vanilla Latte from Starbucks on your way to work. This specific beverage will cost you $4.85. We’ll round that to $5 just for simplicity. This means that you are spending roughly $960 a year on coffee. Say you usually buy lunch three days a week as well, and spend about $10 every time. That’s $1,440 a year on lunches. Add this to the $960 you’re spending on coffee and you have a combined total of $2,400 a year.

So, what are coffee and lunches costing you? The answer isn’t $2,400.

What if you had invested that money instead?

Investing $2,400 annually earning 5% growth produces a gross value in 10 years of $30,351. In 30 years, it produces a gross value of $162,671.

THAT’S your true cost of living. THAT’S lost opportunity cost. See why you need to understand it, account for it and offset it?

3 Dangers of Ignoring Your True Cost of Living

There are three dangers that arise from ignoring your true cost of living:

1. Widespread wealth erosion. What we just examined is only one small area of your life. What about new technologies, goods and services that are created almost daily? I can barely keep up with having the latest and greatest in computers, smart phones and iPads. And now my kids are demanding the best when it comes to these gadgets. What about the planned obsolescence of everyday items, like appliances and cars? These products are made to break down so that you will have to buy them again. What about insurance premiums, investment fees, commissions and taxes? Add all of this lost opportunity cost to the previous totals and you can see your true cost of living.

2. The inability to recapture lost dollars. Two of the most common forms of lost opportunity cost are insurance premiums and financial fees/taxes. People have high insurance premiums because they want low deductibles. But if you were saving the ideal rate of 15%-20% of your income, you would have enough liquidity to cover expenses. Then you could raise you deductible and possible lower your premium costs. All fees associated with any investment account should be completely transparent, and justifiable based on the return and size of the account. Taxes can drastically reduce your net return as well; make sure that your investment accounts are tax managed to help control this erosion. Once you discover the areas where you may be spending money inefficiently, you can then recapture those dollars and put your money back to work for you.

3. Not reaching your full financial potential. Almost every decision you make can result in lost opportunity cost. This makes it one of the largest wealth eroding factors you will encounter and one of the biggest threats to your financial success, now and in the future. If you saw someone casually throw a $100 bill in the trash can, wouldn’t you think they may be a little crazy? Well, if you do nothing to mitigate this risk, you might as well join them. Doing nothing to mitigate this risk can result in you forfeiting millions of dollar over your lifetime.

How a Financial Model Can Help

This doesn’t mean you have to restrict yourself from your favorite coffee, dining out, taking that dream vacation or purchasing things you want. But it does mean that you need to understand your true cost of living, which can be hard to do in traditional financial planning.

A financial model can pick up where tradition falls short. For example, our digital financial model, JB Wealth Builder, can allow you to see where your money is actually going. It can diagnose problem areas where you may be spending money inefficiently. You can then evaluate your degree of lost opportunity cost, and implement strategies to recapture that money and put it back to work.

This can help you remain in the proper financial position where you are able to enjoy the sweet indulgences of life, but also have a financial backbone capable of helping you reach your full financial potential.

How to Lose Your Money in 5 Different Ways

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It’s easier to lose money than it is to accumulate it. This is because accumulating wealth requires you to make a conscious effort. Losing your wealth doesn’t require much thought at all.

You don’t build wealth without some form of discipline, good habits that you practice religiously and that inch you closer toward your goals. This is the conscious effort. Often, the conscious effort tends to disappear once you’ve achieved success. This is the part where you want to enjoy all the hard work you’ve put into building the life you’ve dreamt of. Your conscious effort can even disappear while you’re still working toward your goals. Reaching new milestones of financial success can enable you to do things you couldn’t do previously; it’s easy to get swept up in your newfound freedom. This is why it can feel like you’re constantly taking one step forward and two steps back.

5 Ways to Lose Your Money

The things that can prevent you from reaching your full financial potential are the same things that can wipe out your wealth once you’ve accumulated it. Here are five ways to lose your money in both instances:

1. Not protecting yourself for your full economic value. People want to pay as little insurance costs as possible for the minimum amount of coverage. Most think that leaving enough behind to cover the mortgage or a few years of their salary is sufficient. But your full economic value is worth much more than this. It’s worth the money you will now and in the future, your net worth now and in the future and your legacy now and in the future. Protecting yourself means protecting against premature death or disability, accounting for excess liability coverage and properly structuring your estate. Failing to do any of these things can leave your wealth exposed to a handful of threats.

2. Failing to offset taxes and inflation. These are two of the biggest wealth eroding factors that are out of your control. First, your money needs to outpace inflation, which is the natural erosion of your money’s purchasing power. For example, if inflation is 3%, then your $10,000 this year will only be worth $9,700 next year. Investing your money is a way to offset inflation. While the goal of most investors is to achieve the most efficient after-tax returns, many of them forget to evaluate the tax implications of their portfolio as a whole. Your return doesn’t mean much if you lose most of it to taxes.

3. Living beyond your means. One of the simplest, cardinal get rich rules is to spend less than you earn. Sure, you may have the huge dream home or the exotic foreign car, but if you can’t truly afford it, this doesn’t make you rich. It makes you house poor and car poor, two of the best ways to lose your money faster than you can earn it. It also probably means that you’re building up a substantial amount of wealth. Here’s another cardinal get rich rule: If you have to finance it, you probably can’t afford it. Debt detracts from your net worth, from your ability to save and achieve your goals.

4. Not saving enough money. If you’re not consistently saving a substantial portion of your income every month, then you’re violating another cardinal get rich rule: Pay yourself first. With American savings rates teetering around 5%, it may seem drastic that I’m telling you to aim for a savings rate of 15% – 20%. But this is what funds your core liquidity, your ability to save for and achieve short-term goals. It also funds your future, and includes saving into different unqualified and qualified investment accounts for retirement, your child’s college tuition, and more.

5. Lacking a defined investment philosophy. One of the best things you can do for yourself before you start investing is to create an Investment Policy Statement. This is a guiding statement of how you will invest according to your values and desires, your most important financial goals. Otherwise, you can find yourself making emotionally charged decisions and engaging in bad investor behavior. This includes stock picking, market timing and forecasting, following investment trends and more. Investors who engage in these behaviors often get burned big time.

Why Does it Matter to You?

If you want to reach your full financial potential, you must understand how each of these five things can deter your success. For instance, protection isn’t just about insurance. It’s about protecting your life’s work from the numerous threats that can destroy it. Inflation alone is enough to erode your wealth. You have to put fear of the market to the wayside, and let your money work for you. Taxes will have a direct effect on the real returns your money produces and can significantly erode them. Include low-turnover and tax-managed investments in your portfolio. We can also offer our clients Separately Managed Accounts, which offer the greatest level of tax control.

Acting rich doesn’t count for much of anything. Most of the truly wealthy people would more than likely tell you that they would rather defy society’s image of being rich than being deceptively poor. Neglecting to pay yourself first means that you may lack the funds to achieve your most important goals or living a reduced lifestyle in retirement. Engaging in bad investor behavior can also guarantee these things. But how can you avoid it? How do you know if you’re making the right investment decision? Easy, refer to your Investment Policy Statement. If an investment doesn’t meet its criteria, then you shouldn’t invest. Period.

Building wealth is no small task, but the work doesn’t end there. If you can’t sustain your wealth, then all your hard work means nothing. Sustaining your wealth is where the real work happens.

The 12 Boring Secrets to Getting – and Staying – Rich That Millionaires Won’t Tell You

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There is a certain stigma that has been painted of the “rich:” Mansions, exotic foreign cars, yachts and elaborate themed parties for apparently no reason – like the infamous white party. I mean, why do you need to have a party just to wear a white outfit? Buying into this image makes becoming wealthy seem like an impossible goal for many. But, most wealthy people live very normal lives. That’s because the secrets to getting rich are actually normal, boring secrets.

In the age of billionaire tycoons, being a millionaire may not be as impressive as it once was. In fact, the number of millionaires in the United States is growing: In 2013, CNBC reported that there were 13.2 million millionaires in the U.S. Still, having a million dollars or more in the bank is certainly nothing to write off as insignificant.

Chances are that if you ran into one of these 13.2 million millionaires, you may not even know that they belonged to such an elite group. That’s because most millionaires have figured out that fitting the “rich” stereotype can actually cause more harm than good when it comes to their financial success.

The 12 Boring Get Rich Secrets

Yes, the majority of millionaires are similar to you and I. They just know a few secrets to becoming – and remaining – a millionaire that others haven’t quite figured out yet. And they don’t like to share these secrets because while they’re incredibly effective, they’re also incredibly boring. There’s no glitz and glamour, no “rich” stigmata attached to them. If they told “normal” people their secrets, they might start thinking they can join the club of exclusivity too.

But luckily, we’ve uncovered a few of them and are willing to share them with you. Here are 12 boring secrets to getting rich that your millionaire counterparts won’t tell you:

1. Spend less than you earn. This is probably the most important secret to getting and staying rich. Ask any millionaire, and most of them would tell you that they would gladly defy society’s definition of “rich” rather than being deceptively poor. It’s never a good look when your neighbors see a tow truck repossessing the Bugatti in your driveway.

2. Money doesn’t buy happiness. Simply having money means nothing. It’s what you do with that money and how you use it that brings feelings of happiness and accomplishment. And there’s scientific research to prove it. Buy experiences instead of material items. Delay instant gratification. Donate to a charitable cause. Reach your definition of financial independence.

3. Be debt free. Or at least be bad (high interest rates), short-term debt free. The foundation of financial independence is rooted in having total control over your money. It’s a state of mind that’s cultivated from not having to pay others back, but being able to put your money to work for you instead. This is important, because this sense of independence sans debt can be achieved at virtually any income level.

4. Treat your money like your child. Okay, maybe not literally; don’t put it in a stroller and walk it down the street. But do treat it like a child to a certain degree. Money is incapable of managing itself. It needs help and guidance, a structure within which it can grow. It craves discipline. You can’t expect to just leave your money to its own devices and expect it to turn out the way you want it to. Growing wealth is just like raising a child. Give it your attention on a regular basis.

5. Patience is a virtue. Yes, millionaires are more common today, but no one becomes a millionaire overnight. Becoming a millionaire comes from hard work over a number of years. It comes from diligently saving 15% or more of your income, and understanding that investing is a marathon, not a sprint.

6. Pay off credit cards in full every month. I’ll say it again: Pay off your credit cards in full every month! This is that bad, short-term debt we touched on earlier. It also goes back to instant gratification. Waiting to buy something until you have the cash to afford it will always pay off more than impulsively spending money you don’t have. There’s no doubt that we’re a consumer society that wants things now. But millionaires understand that if they don’t have the cash, they can’t afford it.

7. Pay yourself first. Savings rates in America are at an all-time low. We all find ways to pay out our money to other people, but we forget to pay the most important person: You! Liquidity is essential to becoming financially independent. I cannot stress enough the importance of saving at least 15% of your income on a monthly basis. When something goes wrong, you have a safety net to bail you out. When the opportunity of a lifetime comes along, you have the capital to take advantage of it. Don’t be afraid to think big when it comes to your savings goals.

8. Investing requires a disciplined approach. Investing is one of the most unnatural things you can do; the markets defy traditional logic and reasoning, and have unpredictable behavior. When volatility strikes, it’s hard for investors to stay disciplined. Mostly because they haven’t defined their true investment philosophy, what they believe. Our newest investment strategies are designed to aide this. Their goal is take some of the sting out of volatility, making your investment ride smoother. Millionaires have done this. They know what they believe and why. They know where their money is, what it’s doing and why. They can move with the market instead of fighting it. They base their investing actions on a coherent philosophy that expresses their values, free from emotion and bias.

9. Making a financial “plan” doesn’t guarantee much. Unfortunately, life doesn’t care about your plan, and it won’t adhere to it. Life will happen, I can promise that. So instead of planning for something that we can’t predict and is out of our control, millionaires position themselves to effectively react to changing information. Our digital financial model, JB Wealth Builder, does just this. Being able to pull all of your financial information into one destination and evaluate the impact of those decisions on your complete financial life is imperative. Millionaires know you can’t make smart financial decisions otherwise.

10. Stuff happens. As we just said. There are risks threatening your life’s work every day. Millionaires understand that you’re a fool if you don’t protect yourself against that risk. And no, it’s not just about life insurance or disability insurance. It’s about everything from your personal liability to your estate plan to your tax plan. Most people are only one “what if” away from not reaching their full financial potential. Life events cause ripple effects, and either the dam holds up or the flood breaks through, unleashing chaos. Millionaires understand the importance of a protection first mindset. The rest means nothing if your life’s work isn’t protected.

11. Time is a good friend, if you’re in your twenties. Most everyone will tell you that they don’t feel confident in their retirement nest egg. Sure, not knowing how long it will last or how much you will really need plays a part in this. But the real issue is that too many people wait too long to start saving. They take too great of risk with their money, and end up losing big. They cash out retirement accounts for down payments on homes. We operate with this idea that there’s always time to catch up. Millionaires understand that this couldn’t be more wrong. They start early, they start smart and they know this money is for their future, nothing else.

12. You can’t spend what you don’t see. It’s true, money can burn a hole in your pocket. The only way to snuff out the flame is to get it out of there and spend it. This is why a lot of six-figure earners find themselves living paycheck to paycheck; they spend everything they make. Setting up automatic deductions on your paycheck not only keeps you from seeing this money, but forces you to pay yourself regularly. Millionaires understand this struggle, and realize it can be easier to overcome when it’s out of sight, out of mind.

Why Does This Matter to You?

Really, what this comes down to is redefining what we think of when we hear the term “rich.” Sure, there’s a certain element of glamour to it, a hint of the fairytale. But if that’s all you think being rich means, then you probably feel like you just wasted the last five minutes of your life reading this article.

However, if your definition is a lifestyle where you can quit working for your money and have your money work for you, this advice may just be a home run.

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