The True Legacy of Ben Franklin’s Last Will and Testament

The following represents a chapter excerpt from the forthcoming book From Cradle to Retirement – The Child IRA – How to start a newborn on the road to a comfortable retirement while still in a cozy cradle (Pandamensional Solutions, Inc., September 2017). If you know of millennials (or baby boomers) who are parents (or grandparents), especially if they own their business or are part of a closely-held/family business, you may want to encourage to pre-order the book through Kickstarter project: “Child IRA Book – Is Your Child’s Future Worth $1,000 a Year.” Professional might want to take a look at and back this project, too, because it offers several low-cost opportunities to brand their business in this large and growing market.

Ben Franklin may have been teased into starting twin 200-year trusts in Boston and Philadelphia, but he nonetheless realized a great idea when he saw one. He even recognized the potential obstacles that might present themselves to those tasked with executing his grand plan. More important, we now recognize that, all other things aside, Franklin should be applauded for his eternal optimism in the nation he helped found.

The history of his legacy trusts – The Franklin Trust of Philadelphia and the Franklin Foundation of Boston – instructs us on both the power of compound interest and the dangers of relying on public officials to manage money for the long-term. We might even call it “The Tale of Two Trusts.”

In Franklin’s calculations, the value of both the Boston and Philadelphia Trusts should have been identical after 200 years. Why did Philadelphia’s fund grow slower than Boston’s? Davis says, “If they had been invested for the same time at the same rate, there would be no difference, so it would appear that Philly got lower returns on funds invested than Boston.”

David S. Rose, author of Angel Investing and The Startup Checklist and CEO of Gust in New York City believes the “differences in the remaining funds after 200 years, have very little to do with the way the funds were invested, and much more to do with politics and the uses to which the funds were put. But the essential takeaway here is that Franklin established the funds as a debt fund, with a prescribed 5% return, which meant that, assuming full utilization, he could project exactly what the balances would be in 100 and 200 years. Had Franklin instead taken a 21^st century approach and made them equity funds, investing for partial ownership in the businesses being created (for various reasons that wasn’t practical back then), then one of two things would have happened: either the funds would have evaporated early in the 19^th century when the large majority of the businesses failed…or it would today be the world’s largest charitable fund, likely worth many tens of billions of dollars. Such is the leverage of equity!”

What likely caused the trusts to miss their modest targets (remember, Franklin assumed only a mere 5% annual growth rate) could be attributed, at least in part, to the changing economic landscape. This applies both to the nature of business and interest rates. The industrial revolution wiped out the need for small entrepreneurs (or “artisans” as Franklin called them). At the same time, overall economic growth reduced the cost of capital, bringing lending rates down for all but the riskiest borrowers.

These factors, however, were recognized and addressed within the first hundred years of the trust. Despite these impediments, Boston came within 57% of attaining Franklin’s 1890 goal. Philadelphia, however, missed the mark considerably, managing a very weak 18% of Franklin’s estimate.

From the beginning, it was clear the two funds would be managed in different styles, given the different corporate structures of the host cities. Control of the Boston funds remained in private hands for the longest time. Philadelphia very quickly placed responsibility for the Franklin Trust in the hands of a political committee. Alas, as time marched on, the politicians marched in, and Boston’s Franklin fund could not escape this inevitability.

While Philadelphia had this struggle in the latter half of the nineteenth century, Boston went through this phase in earnest during the post-World War Two era. This had a dramatic impact on the outcome of the trust’s growth. By the early 1950s, the Boston Trust was valued at five times more than the Philadelphia Trust and well on its way of making up ground lost at the 1890 accounting. At the time of the trust termination date, though, the Boston fund was only twice that of the Philadelphia fund. In the end, the Boston fund missed Franklin’s target by nearly 33%. Philadelphia missed it by almost 70%.

Still, it does show something that an initial investment of about $9,000 in 1790 could grow to a total value of $7.25 million some two hundred years later. That’s certainly a testament to the power of compound interest – the very thing Franklin counted on and wanted to demonstrate.

Indeed, this obvious success inspired at least one copy-cat trust. On November 12, 1928, Jacob Friedrich Schoellkopf, Jr., an industrialist from Buffalo, New York, established the Jacob F.-Wilma S. Schoellkopf $100,000 Trust Fund for Buffalo. This fund was set up like the Franklin Trust save for one very important difference: It had no termination date. It would accumulate and reinvest all income for the first 100 years, upon which 50% of its value would be distributed. From then on, the remaining undistributed portion would be reinvested and, every fifty years in perpetuity, half the value of the fund would be distributed.¹

Also unlike the Franklin trusts, there appear to have been no major restrictions on the type of investments in which the Schoellkopf Fund could be placed. In addition – and here is a key distinguishing difference – the Schoellkopf Fund was completely private. It involved no elected officials. Even the distributions went to a private foundation, not one run by political authorities.

Could this have given the Schoellkopf Fund an advantage in terms of its growth prospects. In the 1950s, Boston’s Franklin Trust grew 75%. The Schoellkopf Fund grew 285% during the same period.²

It may not have been the intention of the ever-optimistic Ben Franklin, but the faithful execution of the codicil in his last will and testament proved, over its 200-year lifespan, that there may be a greater harm to long-term growth prospects than either war or economic calamities. The Franklin trusts, administered by public officials, may have demonstrated more than the success of compound interest. They may have inadvertently revealed the potential for significant damage when we place elected officials in the position to oversee long-term monies.

Jack Towarnicky, Executive Director at Plan Sponsor Council of America in Columbus, Ohio, explains the shortfall of the Franklin Trusts in blunt terms. He says, “It isn’t clear, but I believe the worst shortcoming comes from giving governments control.” Perhaps Jack bases that conclusion on what we’ve seen over the last 80 years when it comes to government managed long-term investments. It didn’t always used to be that way. For most of our nation’s history, and especially during the first century-and-a-half of its existence, Americans have had a very different view of retirement than they have today.

How can this traditional perspective on retirement – borne before the dawn of the Industrial Age – enlighten us given today’s very different understanding? It turns out, after looking at the contemporary record, we can find answers to today’s most pressing questions. Join me in the next chapter and we’ll discover them together.

¹ Fess, Margaret, “Trust Designed to Act as ‘Money Tree’,” Buffalo Courier-Express, Sunday, March 27, 1960, p 13-B
² Fess, Margaret, “Trust Designed to Act as ‘Money Tree’,” Buffalo Courier-Express, Sunday, March 27, 1960, p 13-B