I‘ve had a continuing series on this site called “Retiring Wealthy On An Average Salary” where I chronicle the stories of regular folks who have planned ahead and been able to retire wealthy while never making more than an average salary during their working years. The stories can be pretty inspiring and hopefully will nudge people towards making good financial planning decisions.
While it's fun to read the stories that had a good ending like those, unfortunately there are far too many examples of people who have squandered their fortunes as well. Today I wanted to look at one such story, that of Billionaire Heiress Patricia Kluge.
Patricia Kluge: Billionaire to Bankrupt
Patricia Kluge was once married to one of the wealthiest men in America, TV mogul John Kluge. In 1989 Kluge topped the Forbes 400 list with a fortune of $5.2 billion. They enjoyed the good life with homes and vacation houses all over the world. In 1990 when the couple divorced Kluge received a huge settlement that was by some reports over 1 million dollars a year, and included a $100 million estate in Virginia called Albemarle. The 24,000-square-foot home, which was once valued at over $100 million, features 8 bedrooms, 13 bathrooms, a helipad, stables and two kitchens. From Yahoo:
Patricia Kluge was once known as “the wealthiest divorcee in history.” Those days are over. Kluge, who had formerly been married to the late billionaire John Kluge, recently filed for bankruptcy protection, citing debts somewhere between $10 million and $50 million and assets between $1 million and $10 million.
So what went wrong, and how did this wealthy socialite lose it all?
By some reports, despite the fact that they had millions of dollars in assets, Kluge and her new husband leveraged themselves to the hilt, and were up to their ears in debt because of a vineyard and winery business they had started.
The seeds of Kluge’s financial downfall were sown in 1999 when, along with third husband William Moses, she established the Kluge Estate Winery and Vineyard on 960 acres near Albemarle. The couple’s plan: Create vintages that would establish Kluge Estate, and subsequently Virginia, as an East Coast mecca for fine wine.
…Kluge decided to expand aggressively. Over the past five years she took out $65 million in loans, according to public records. The money went into expanding wine production and building a super-luxury subdivision called Vineyard Estates, which was to include 24 multimillion-dollar homes with pools, outdoor kitchens, tennis courts, horse trails–and even space for private vineyards.That’s when the housing crisis hit. Vineyard Estates failed to draw buyers. Property values plunged.
In 2009 Kluge put Albemarle up for sale. Sotheby’s International Realty initially listed it for $100 million. The figure was cut to $48 million in early 2010 and then to $24 million, where it sat until February’s bank foreclosure.
Since they faced foreclosure in February of this year, another high profile billionaire stepped in to save them – Donald Trump. Trump purchased a portion of ownership in their winery business to the tune of 6.2 million dollars. While they're not out of the woods quite yet, I guess it pays to run in those circles and to have wealthy friends who can bail you out of situations like this.
What Can We Learn From This Situation?
So what can we learn from this story of billions to broke?
- Live on less than you have coming in: One thing we've seen time and again is that those who live on less than they make or have end up coming out ahead in the end. Those who live on more than they make – whether they are a billionaire or living in poverty, will end up with a mountain of debt and a bankruptcy hanging over their head.
- Debt carries substantial risk: It seems to have become conventional wisdom that debt is a good thing when you're running a business – just a cost of operating a business nowadays. I don't think people really focus enough on the risk that is entailed in taking out a ton of loans and debt. Why not try to run a business on cash – like Dave Ramsey and his empire?
- Plan ahead for unforseen negative events: Sometimes there are things that happen that weren't foreseen, like the housing and economic crisis that hit Kluge and her husband so hard. Plan ahead for doomsday scenarios – and make sure you're diversified! Don't put all your eggs in one basket like they did.
- Be careful of expanding your business too fast: From the stories I've read it sounds like Kluge and her husband tried to expand their winemaking facilities and build a super-luxury subdivision on their land at a faster pace than they probbably should have. When the downturn hit, they lost it all.
What other lessons can we learn from this story? What do you think – would you ever be able to lose it all if you had that much money to begin with? Are we all susceptible to bad decision making if the situation is right?
I am surprised that she had a mortgage on the property. People at this level are usually more conservative. I think part of her problem was she had money, but she never made any on her own. The experience and skills you learn by accomplishing wealth goes a long way to keeping it. This is one of the reasons that people who win lotteries lose their winnings.
Yeah, it is interesting that she had a mortgage on the property. I guess with a 100 million dollar estate maybe she couldn’t afford to live there without one after the divorce.. ? :)
Too much leverage is one of the biggest problems that I see here along with the lack of liquidity or cash flow to manage that leverage. If the wines had sold or the property had sold, it might not have been such a problem. But they had expenses without income which was a major problem.
I think you’re right in that they were counting on their properties being worth quite a bit more than they currently are – when the real estate market and economy tanked, they lost it all because their property values plummeted, and they didn’t have enough liquidity to stay afloat.
I know someone who came from a wealthy family and married a wealthy man then later, after their divorce, continued living the lavish lifestyle she had grown accustomed to. She’s not bankrupt yet, but she’s pretty much wiped out her savings and retirement. I think it goes to show that if you didn’t earn the millions yourself, you don’t really understand how money works. It’s unfortunate Ms. Kluge didn’t have a good business sense.
You make an important point – that it’s important to be realistic about what kind of a lifestyle you can lead given what resources you have. If you’re not financially secure and don’t have money in the bank, don’t continue spending like there’s no tomorrow.
It seems that in the case of Ms. Kluge, her bankruptcy could have been avoidable on many countless reasons but what stands out most to me is your third point regarding planning for future negative events. I don’t blame Ms Kluge for the housing crisis or property value decreases, but taking on debt to invest in these types of things are common mistakes of beginner investors. Do not invest what you can not afford to lose.
Did Trump jump in for profit or generosity?