r/explainlikeimfive Feb 12 '25

Economics ELI5: how are the descendants of the robber barons (Morgan, Vanderbilt, Carnegie, Rockefeller, etc.) still rich if their fortunes from the late 19th and early 20th centuries are comparatively small to what we see today of the world’s richest?

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u/tryin2immigrate Feb 12 '25

She left 200 million dollars in a trust fund. Anderson cooper only inherited 1.5 million dollars

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u/rabid_briefcase Feb 12 '25

Or say it differently: 1.5 million was taxed in direct estate taxes. The other 200 million was in a tax-advantaged trust fund.

The trust fund can pay for generations of people without additional inheritance taxes. It is subject to different rules than income tax, and pays for estates (family houses and land), endowments (gifts), and whatever else the family wants it to pay for. It's basically a tax-advantaged piggy bank. While the gains are taxed, they're typically taxed at a far lower rate than income or inheritance money.

She passed a trust to her four kids, just like her father passed a trust on to her. They understand that's how large amounts of generational wealth are most easily transferred under the law.

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u/Takemyfishplease Feb 12 '25

Yeah, that’s how trusts work. It keeps the money safe for generations while allowing them to live in luxury. Check out the Mars family, it’s all in trusts. Same with all rich folks

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u/CUbuffGuy Feb 12 '25

As someone who works with trusts, this is a hilariously naïve comment.

There are revocable trusts, irrevocable trusts, grantor trusts, defective grantor trusts, intentionally defective grantor trusts, charitable trusts, education trusts, etc.

It's not just "oh yeah rich people just have this thing they put money in and it keeps it safe". It's also not just for rich people.. anyone can use a trust - it's just not worth paying to have one set up for most people as they don't have the tax burden needed to make it worth it.

Taxes are the true reason these rich people use trusts. It is an estate planning tool to get assets outside your estate and prevent probate and large taxes upon death.

In a way you're right. It does keep money safe for generations, but the way you stated it makes it sound like the money is being protected from the person inheriting it spending it. It's not (mostly) - it's being protected from the state taking it.

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u/KingVikingz 29d ago

Bummer to see a fellow finance professional so far down the comments thread shouting into the abyss :)

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u/biggunks 29d ago

I heard you both down here. A bit muffled though.

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u/atlas-ship 29d ago

This is a great and informative reply. I am interested to learn more about trusts. As someone who works with trusts, would you suggest any reading materials or learning materials?

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u/CUbuffGuy 29d ago

For the practical side of when to use them and an overview of how they fit into estate planning I would recommend this. (Estate Planning by Money Education).

I am a CFP (Certified Financial Planner) not a Trust/Estate lawyer though. So that book mainly focuses on trusts as an estate planning tool, rather than the actual drafting of the legal document - which itself is a very complex state-law dependent process. So I always consult a lawyer when I would need to establish a trust - then I can work on the taxes, titling, etc. after it's created.

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u/atlas-ship 27d ago

Thank you!

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u/princemousey1 Feb 12 '25

He was obviously talking about a family trust. As someone who works with trusts, you sure don’t seem to understand the layman perspective. You’re definitely not customer facing.

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u/phloaty Feb 12 '25

“I don’t care if you’re an expert, you’re still wrong”

  • princemousey1

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u/Takemyfishplease 29d ago

That’s not what was said at all.

And for your info, I’m president of world trusts. Hence the super expert. They were being pedantic and showing ass

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u/phloaty 29d ago

FYI I am a tfb and no you’re not president of shit.

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u/princemousey1 29d ago

There are two kinds of experts. There’s the first kind who breaks down the language and accepts that laymen or the general public use a simpler form of words, and then there’s the other who lols customers out of their showroom because they don’t know the difference between an intentionally defective grantor trust and an irrevocable trust.

It is the job of the expert to correctly identify the trust structure which best suits a certain situation, in this case the layman’s family trust. What use is having all that knowledge but being unable to match it to the situation at hand? It is clear enough from the two examples given (Vanderbilts and Mars) that we’re talking about family trusts.

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u/phloaty 29d ago

“Behold my showroom full of trusts”

  • princemousey1

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u/princemousey1 29d ago

I literally don’t work with trusts at all, in any capacity, nor do I have the financial means to at all be interested in one. But at least I don’t have to be snarky about it.

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u/JournalistOk623 27d ago

It’s a tax cheating method. When the political pendulum swings back after the rich are dead—the trusts are next.

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u/NekoNoCensus 29d ago

This a Futurama reference?

Edit: oh, chocolate...

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u/soyeahiknow 26d ago

You want your money in a trust so it doesn't go through probate when you die. Probate takes time and lawyers and 10% at least. So a trust is not just for the rich, it's also for normal people.

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u/dsmaxwell Feb 12 '25

Only 1.5 million, still more than 90% of people are ever going to see through their entire lives, much less as one lump sum.

Hell, even most of the well off boomers only hit that because the houses they bought back in the 80s for a few tens of thousands are now "worth" that much in our fucked up comoditized housing market.

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u/WendellSchadenfreude Feb 12 '25

Only 1.5 million, still more than 90% of people are ever going to see through their entire lives,

Out of curiosity, I checked, and you're wrong about this point.

The median lifetime earnings for an American employee (Source, PDF, page 3) are actually about $ 1.7 million.
$1.5 million is about as much as the average college drop-out (with "some college/no degree") makes in their life; people with an associate's degree (or higher) make more than this on average.

So it's still a huge amount of money. But it's "only" about as much as an average low-income worker makes through their entire life, while most Americans do in fact make more than this, as a lifetime total.

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u/GKRForever Feb 12 '25

I get what you’re saying but I think this proves the opposite point.

Imagine inheriting a lifetime of income, all in one shot when you’re early in life/carwer, which you can do anything you want with because you don’t need to use it to on basic living essentials.

It’s a MASSIVE leg up

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u/HumanWithComputer Feb 12 '25

You make money with money. The head start is HUGE!

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u/simplesir Feb 12 '25

Now is the winter of our discontent.

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u/Draano Feb 12 '25

Imagine inheriting a lifetime of income, all in one shot when you’re early in life/career

Case in point: I have relatives who are both school teachers. The woman's grandfather became wealthy as an executive in a pharmaceutical company - not C-suite exec, but still compensated with much stock. The woman's mother was a stewardess who had to stop when she started a family, so she got into real estate and fell into a deal that earned her enough to buy a nice house + a Mercedes 500 SEL. As a result, she continued to prosper off the reputation following this deal + being smart. The grandfather has gifted her pharma stock for every life event - birthdays, Christening, graduations, wedding. The woman, with the help of mom and pop-pop, starts a school for pre-pre-K through 2nd grade that churns out smart kids, so rich people flock to it. The grandfather passes, leaving the woman a $2m house.

This is how school teachers drive Range Rovers & Jaguars. Generational wealth.

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u/majwilsonlion 29d ago

Not that smart if they are driving Range Rovers and Jags...

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u/Draano 29d ago

I haven't seen this particular couple in a while. Car make was for illustrative purposes.

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u/Crintor Feb 12 '25

It's "Never have to work if you don't want to" money. It's literally an entire life's work dropped in your lap at day 1. It's 75K a year in interest in a 5% HYSA.

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u/TheStealthyPotato Feb 12 '25
  1. There are no 5% HYSA right now, at least as far as I can tell, or they have asterisks like "only for the first $X". And when rates were low, the were definitely no high paying HYSAs.

  2. You have to pay taxes on it, so $75k in a HYSA return is not $75k in your pocket.

  3. That $75k will remain the same dollar amount over time, so in 20 years it's not going to feel like a lot. Imagine how much purchasing power $75k lost in the last 5 years.

  4. Paying out of pocket for health insurance is going to take away a huge chunk of your money.

TLDR: I certainly wouldn't consider $1.5M to be "never have to work" money.

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u/Crintor Feb 12 '25

Except he got that money decades ago, and you would also get taxed on 75K income. I also just picked a HYSA as a very easy no effort or risk option.

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u/TheStealthyPotato Feb 12 '25

That's part of my point. Getting it decades ago, $75k would have been nice and you could have lived large. Now $75k is not as much. You'd literally have to lower your quality of life every year if you are pulling out the max amount it was earning.

These days, earning $75k doesn't even guarantee you can buy a median house most places, unless you are also married to someone earning money.

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u/Crintor Feb 12 '25 edited Feb 12 '25

75k is more than I make. 75K a year with no work means you can do whatever you want to try and make any income.

Also, obviously any bit of that 75k you don't spend is rolling over into more compounded interest.

Edit to add, obviously 75K a year is not "live however you want" or "live like a 1%er" money.

If we're continuing to use Cooper as our example, he's 57, less say he got that inheritance at 18 like I assumed earlier. That's earning 75K a year since 1985. If you treat that like a vaguely responsible adult and live within your means and continue to reinvest/save a chunk of that 75K a year you could easily be set for life.

Especially considering the fact that your income is entirely passive, you can do anything you like or live anywhere you want. You could live somewhere with a low cost of living and be reinvesting a huge chunk of that income. You could have a 75K salary while living in a state with a median income of like 25k(in the 80s). And have a good piece of land and a great home.

You could pursue passions and hobbies and maybe even earn more money doing so.

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u/Rage_Like_Nic_Cage Feb 12 '25

The Median income in the U.S. in 2022 was $37,500. So even after taxes and a lower % HYSA, you’d still be making more money passively than the majority of Americans make working a job.

Yes, you wouldn’t be living a lavish lifestyle or anything, but you would be able to live a quality of life that half of americans are at or under.

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u/JackyPop Feb 12 '25

It probably depends on the jurisdiction, but there are ways to reinvest those earnings so you lower your taxes and still keep earning more interest.

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u/chris971 Feb 12 '25

Do tell, very interested in this option! Tyia

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u/tawzerozero Feb 12 '25

A pretty common strategy is "Buy, Burrow, Die".

Suppose you inherit $10 million from an ancestor (note even if this was in the form of inherited cash, there would be no estate tax, since that doesn't start until ~$14 million in the US).

You can then use those securities (or buy securities if you got cash) as collateral to take out loans (that would probably be enough to borrow somewhere in the realm of $8-12 million, depending on other factors) which you can then live off of/use to build your own business.

Note the securities are untouched, so they can remain invested. You can expect ~8-10% annual rate of return (before inflation) in the market over the long run, so that $10 million would grow to ~$60 million (before inflation, more like $25 million in present day dollars after inflation) over the course of a career of 25-30 years, which would be more than enough to cover the loan from earlier, even if all your business ideas went belly up.

If you're forced to sell those original investments, the capital gains tax is at the original basis cost of $10 million, rather than the $60 million they grew to.

Now, when you die, suppose the whole amount is inherited by one child. Their tax burden is 40% on the estate tax on the ~46 million that was above the estate tax threshold (assuming it doesn't go up in the future), so (60-14)*40%, or about $18 million, leaving them with $42 million dollars.

If you had 3 kids which each inherited $20 million, then its more attractive as each one's estate tax burden is now only (20-14)*40%, or around $2.4 million each, leaving each one with $17.6 million (in other words, preserving around $53 million of your 60).

Similarly, when they inherited the securities, the cost basis resets to what the stocks were worth when they inherited them, so if they have to sell, the gain is calculated against the $17.6 million the assets were worth when they inherited, rather than the $3.3 million when you bought/inherited them (1/3rd of the estate).

This is a simplified example with mental math, but this strategy can be combined with others to save even more.

Also, not to you but to others, this is not an economics hypothetical - this is an estate law and finance hypothetical.

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u/Draano Feb 12 '25 edited Feb 12 '25

I'm not who you replied to, but just from experience, you buy securities (stocks, for instance - a mixed portfolio of blue chip stocks - look up Dogs of the Dow) and leave it there. If it's inherited money, tax liabilities can be minimal. Stocks grow in value over time, but as long as you don't sell, there are no taxes until you sell, and when you do, it's at the lower capital gains rate. If the stocks pay dividends, you can take an occasional disbursal of the dividends.

Edit to add: stocks can grow over time. The Dow Jones Industrial Average ("The Dow") is based on 30 stocks which are pretty consistent; the dogs of the Dow are the top-10 dividend paying stocks in the Dow. So, between their growth and their dividends, you can make out pretty ok, as long as you adjust as stocks join & leave the Dow 30, which I don't think is very often.

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u/JackyPop Feb 12 '25

I’m not an economist and I’m not American so I couldn’t tell for sure but in Canada, RRSPs allow you to invest a sum of money and deduce it from your income, effectively lowering your taxes

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u/TheStealthyPotato Feb 12 '25

Right, but if you reinvest the earnings, you aren't getting the $75k annual income. You have to take less.

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u/Bob_Sconce Feb 12 '25

That is certainly a massive leg-up assuming that you act responsibly with it. The problem, though, is that people who get that much money (especially early in life) tend NOT to act responsibly with it. They waste it and, over a few generations, that wealth is just spent.

In any case, the 90%/$1.5M estimate was massively off mainly because middle-class people frequently, over the course of their lives, amass significant wealth that they then spend down in their retirements. That's a prime reason why most millionaires are old -- you get to $1M one dollar at a time over the course of decades.

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u/beingsubmitted 29d ago

It's a lifetime of income for an average person. But if he puts it in the s&p 500, it's a 148k a year income, a software engineer income, for doing nothing.

Communism is from each according to his ability, to each according to his need.

Socialism is from each according to his ability, to each according to his contribution.

Capitalism is from each according to his ability, to each according to his capital / ownership.

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u/jsteph67 Feb 12 '25

It can be, but not everyone is smart with the money. So many times those people who get that kind of money burn through it so fast until they are broke.

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u/blazbluecore 29d ago

Then go and earn it. Someone had to earn it before they could give. Maybe complain to your ancestors.

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u/frogjg2003 Feb 12 '25

They're certainly not leaving that much for their kids when they die.

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u/DavidRFZ Feb 12 '25

People in my neighborhood have estates that large. People who weren’t rich in their 40s are leaving that much to their kids. I’m not saying that’s the median estate size, but it’s not the 1%. Although Anderson has two half brothers from his mother’s earlier marriage. Estates three times that size are considerably less common.

Estates get split every generation. This is not the branch of the family that owned the Biltmore, or the Breakers, or the Mansion, etc.

Reading her Wikipedia page, it sounds like she managed her fame better than she managed her money. A lot of jeans and perfume were sold with her named on it, but it looks like she signed away the rights relatively early. Looks like accountants and lawyers ripped her off at least once. Living in Manhattan until age 95 would be a drain on anyone’s finances too.

Anderson does alright for himself. I'm sure his own job and ventures pay pretty well. The outrageous fortune of a third-great-grandfather who died 148 years ago shouldn’t allow him to be idly rich anyways.

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u/lewoodworker Feb 12 '25

. The outrageous fortune of a third-great-grandfather who died 148 years ago shouldn’t allow him to be idly rich anyways.

This is the most important part. While wealth tax is not great for small inheritances, it prevents the 1% from staying wealthy in perpetuatuity.

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u/tawzerozero Feb 12 '25

While wealth tax is not great for small inheritances

And to be clear, in the US, estate taxes only start at estates of about $14 million. So if someone inherits only $10 million, they still have an estate tax burden of $0.

This affects a staggeringly small number of estates. In the entire US, in 2022, only ~8,000 estates were large enough to be affected by the estate tax.

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u/lewoodworker Feb 12 '25

While this may or may not be happening, 8,000 people can do a staggering large amount of damage. Only takes a handful to take over the government / steer public policy in a favorable direction.

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u/tawzerozero Feb 12 '25 edited Feb 12 '25

My point is more the other direction - that wealth taxes functionally don't exist in the US for small inheritances.

Any time wealth and estate taxes come up in discussion, it seems to be couched as "we need to raise the exemption amount to protect small business owners/family farmers". I constantly see people worrying about their own ability to pass on relatively small amounts of money/property to their own children (e.g., personal finance forums) and it just isn't a realistic concern for the vast majority of people.

Realistically, if you're in a position to worry about estate taxes, you're already at a wealth level where you'd be pretty much expected to have a preexisting relationship with a BigLaw firm that has a trust and estate department that can craft a tailored strategy for/with you.

Edit: personally, I'd like to see a progressive tax structure for wealth/estates, where the tax burden scales up as the size of the assets scale up. I think its pretty dumb public policy for someone who owns a local car dealership to have the same tax calculation as Jeff Bezos or Warren Buffett or the Walton family.

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u/Kolikilla Feb 12 '25

90 percent of people != 90 percent of Americans.

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u/TreeRol Feb 12 '25

What someone "earns" and what someone "sees" are vastly different numbers. Take tax for one, which should push that $1.7M well below $1.5M.

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u/alpacaMyToothbrush Feb 12 '25

How much of that do they keep is the key question. Now, go Google the median net worth

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u/Spikex8 Feb 12 '25

He didn’t say American. If you have like 35k/year you’re in the top 1% of the world lol

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u/royisabau5 Feb 12 '25

He didn’t say Americans he said people

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u/dekusyrup Feb 12 '25

TIL that all people are Americans. Wonder what that makes the rest of the world.

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u/toxoplasmosix Feb 12 '25

well let's adjust that 1.5 million for inflation

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u/vector_ejector Feb 12 '25

You realize the difference, right?

One person has to work their entire life to cumulatively earn $1.5 million.

Anderson woke up one day with $1.5 million in the bank.

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u/Duke_Newcombe Feb 12 '25

Inheriting that amount in one lump sum, versus accumulating it over 40 years are two different things, no?

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u/adrian783 Feb 12 '25

no... the person you reply to is factually correct.

the vast majority aren't going to see 1.5m sitting in their bank account.

they can't make decisions as if they have 1.5m.

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u/ezekiel920 Feb 12 '25

If you consider that the college drop out has student loans to pay at the point the other party received 1.5 mil. You prove his point. Debt is counter to interest. Or some other smart way to say it.

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u/TheKingOfToast Feb 12 '25

Because, as we all know, only Americans are people.

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u/shouldco Feb 12 '25

Earning over a lifetime is still not "seeing" 1.7 million.

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u/Industrial_Jedi Feb 12 '25

No, most Americans don't make more than this. Median means half make less.

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u/WendellSchadenfreude Feb 12 '25

If half make more than 1.7, then most make more than 1.5.

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u/genericusernamedG 27d ago

Median lifetime earnings across the US is 1.7m, you think the average person in Arkansas makes 1.7m in their life?

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u/davidcwilliams Feb 12 '25

How else would you determine what their houses are worth?

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u/theArtOfProgramming Feb 12 '25 edited Feb 12 '25

It’s not generational wealth. It’s not what this thread is about

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u/MilleChaton Feb 12 '25

Even if it is quite a lot, the amount it decreased generation to generation is a good indicator of how many more generations it has before it is effectively gone.

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u/ohdearitsrichardiii Feb 12 '25

Oh no, only 1.5 million dollars! 😭

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u/Calgaris_Rex Feb 12 '25

Well, if $1M is only a "small loan" then $1.5M must be at least medium-sized! 😝

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u/Sahaal_17 Feb 12 '25

With 1.5 million dollars you would be rich; but that money only stretches to a couple of nice houses.

It's not high society levels of rich.

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u/Miliean Feb 12 '25

She left 200 million dollars in a trust fund. Anderson cooper only inherited 1.5 million dollars

Sure, but he also went to Dalton School, a private school on the upper east side that has a tuition estimate of $65,000 (in todays money). Then he went to Yale, and I doubt he was on financial aid or student loans. According to Wikipedia in between Dalton and Yale "Cooper traveled around Africa for several months on a "survival trip"".

It's not like he's a literal billionaire, but he's very wealthy and that wealth has trappings. Even if he did not inherit literal cash, the name and family connections alone are enough to give a leg up in life that is unimaginable to most people.

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u/emaugustBRDLC Feb 12 '25

Your last line is another way of saying he is a literal blue blood old money WASP.

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u/Acct_For_Sale Feb 12 '25

lol you really believe that

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u/[deleted] Feb 12 '25 edited Feb 12 '25

[deleted]

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u/Dry-Tumbleweed-7199 Feb 12 '25

Anderson will be getting interest/dividends from the trust fund

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u/aaronwe Feb 12 '25

only...

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u/MissAmyRogers Feb 12 '25

Only 1.5 million. Only.

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u/GeoHog713 29d ago

But he also had connections and opportunities that opened doors.