By George Paulsen, Tax and Advisory Partner
As we have mentioned in previous articles, it is important to keep your will and trust documents up to date, and especially before the end of next year. Federal law is currently scheduled to cut the estate tax exemption in half at the end of 2025. Even if you don’t think your estate is worth over $6 million, consider having it reviewed because of the many law changes in the last ten years.
Success stories
Several estate planning tools stand out for their effectiveness in preserving and growing intergenerational wealth among America’s elite.
Spousal Lifetime Access Trusts allow assets to be moved out of the estate while still providing for the spouse, blending flexibility with tax efficiency. Charitable Remainder Trusts serve those interested in philanthropy, offering income streams and tax benefits, with the remainder going to charity. Beneficiary Defective Inheritor’s Trusts and Grantor Retained Annuity Trusts are favored for transferring wealth with reduced taxes, enhancing control over and the growth of assets passed to heirs.
Another strategy is the “buy, borrow, die” method, which leverages appreciating assets such as real estate stocks, art, and collectibles as collateral for loans. The loan proceeds are not taxable income, and no capital gains tax is incurred by borrowing instead of selling. Upon inheritance, beneficiaries use the assets to settle any outstanding loans and benefit from a stepped-up cost basis, potentially reducing or eliminating capital gains tax on these assets when sold.
Successful estate planning is typically a well-guarded secret. This discretion is not accidental but by design, as effective plans avert the public disputes that often accompany less carefully crafted strategies. By using trusts and other legal tools, families maintain the confidentiality of their wealth management strategies and estates, keeping them out of probate and the public domain. While we don’t know all the financial secrets of the wealthy, we do know some of the wealth-preservation tools employed by dynasties like the Rockefeller’s, Hearst’s, and Getty’s.
The Rockefeller’s
The Rockefeller saga began with Standard Oil in 1870. Under Rockefeller’s guidance, the company dominated 90% of U.S. oil refineries and pipelines, earning him the title of the world’s richest man and marking him as one of the first billionaires. With a fortune that would be valued at over $600 billion today, the Rockefellers are one of the most storied families in American history.
The cornerstone of the Rockefellers’ enduring wealth has been their sophisticated use of estate planning techniques, notably their two major trusts: the 1934 Family Trust and the 1952 Dynasty Trust. These trusts held interests in the descendants of Standard Oil and diversified into real estate and other investments. The holdings became so extensive that the family created Rockefeller Financial Services to professionally manage the assets through separate arms dedicated to investments, venture capital, family businesses, liability insurance, and risk management. This multi-pronged approach allowed the family to maintain their wealth across varied economic climates.
A critical component of their planning involved the use of irrevocable trusts supported by life insurance. Sizable permanent life insurance policies are purchased for each family member, which allows them to borrow against the cash value of the policies tax-free during their lifetimes. Upon a family member’s death, the life insurance payout is used to clear any outstanding loans and replenish the policy’s value, with excess funds flowing back into the family trust.
The integrated management framework they created has ensured that their wealth –currently estimated around $8.4 billion – continues to benefit dozens of heirs over six generations.
The Hearst’s
The Hearst family legacy began with William Randolph Hearst, who left behind a trust and estate in 1951 valued at around $400 million in today’s dollars.
Hearst chose not to pass his fortune directly to his children and grandchildren. Instead, he formed a board of 13 trustees - comprised of five family members and eight current or former Hearst Corporation executives - to manage the trust. This trust not only owns and oversees Hearst Corporation but also makes annual distributions to Hearst’s descendants.
The structure of the trust, along with its management and distribution mechanisms, is shrouded in secrecy, adding a layer of protection for the family’s assets. Despite individual heirs encountering legal and financial issues, the Hearst trust has continued to provide for them effectively, safeguarding the family fortune from potential losses.
Today, Hearst Corporation has grown into a massive conglomerate, generating over $10 billion in annual revenue. The company is involved in over 360 different businesses, and the trust continues to distribute dividends to more than 65 members of the Hearst family.
The Getty’s
The Getty family’s fortune originated with J. Paul Getty, who amassed wealth through his oil enterprises. He famously bequeathed his art collection, along with other properties, to a museum trust. This move not only exempted these assets from estate taxes but also led to the establishment of The Getty Center, now one of America’s most frequented art museums. Further tax efficiency was achieved by domiciling the family trust in Nevada, avoiding California’s state income tax on the trust’s income.
However, the Getty estate plan, while effective in minimizing taxes, has not been without complications. The Getty heirs have faced a series of disputes that have persisted for nearly as long as the trusts have existed. These ongoing conflicts highlight some of the complexities and challenges that can arise even from well-intentioned estate planning efforts, underscoring the need for continuous management and adjustments as circumstances change.
The wealthy aren't perfect, but many families have preserved their wealth for generations.
As you can see, even the wealthiest families have challenges that can put stress on a good plan. The plans implemented by the families mentioned above are used by Hood & Strong LLP clients when they fit the circumstances. There are many complexities that need to be considered, with one of the toughest being how to teach the next generations the importance of preserving wealth so that they and their children can benefit from the wealth creators’ efforts.
Next month we’ll look at the bad and the ugly as we go over some famous family fails. In the estate planning professional world there is a rule of thumb that wealth will be redistributed out of the family in three generations. Some of the examples presented will show why that often happens.
As always, if you would like to discuss these issues with your Hood & Strong advisor please give us a call, email or text.
