Helping An Old Friend Manage His Estate In An Interesting Way

The grandfather of an old friend of mine called me a while back, saying that he had a few questions that he thought I could answer for him. He’d heard about The Simple Dollar through the grapevine and wanted to start out talking to someone he knew, but someone without anything financially at stake in his situation.

He revealed to me that he had an estate worth about eight million dollars, tucked away in investments. He had actually moved everything to a very simple portfolio – all of it was either in treasury notes or index funds and he managed it all himself. His family believed that he was actually rather poor, but the truth was that he lived off of a pension and his Social Security check and was actually contributing quite a bit of the pension to this money.

He had decided that he was going to start up some sort of trust and he wanted to announce it to his family at a family reunion in a few months, but he had no idea where to start. Here’s the process we went through to develop the plan.

We talked about the key principles. He wanted all of his descendents to have an equal piece of the pie – I asked him if that included direct descendents born after his passing and he said that it did. However, he did not want the money to turn into a feeding frenzy – he wanted to give out the money slowly for a very long time, to make it last and give them each a little boost here and there.

We set up a general plan. After some discussion, we decided that the best bet would be to put everything into a trust. Every single direct blood descendent of his would get a share of this trust. When he passed (or pulled the trigger on the start of the trust), each year, 4% of the value of the entire trust would be given out as distributions.

Here’s an example. He has three children, nine grandchildren, and eight great-grandchildren right now. That makes twenty equal shares. Let’s say the estate has a value of $8 million on the day the first distribution is to happen. 4% of that estate is liquidated, meaning $320,000 in cash appears and the investments are then worth $7.68 million. The taxes are paid on that amount (let’s say 15%, leaving $272,000) and then that’s split into twenty equal parts and distributed to each shareholder – $13,600 a pop.

In the ensuing year, the portfolio grows 10%, growing to a value of $8.45 million. At the end of that year, 4% is liquidated again, generating $338,000 in cash. The taxes are paid, then the remaining money is split into twenty shares, a value of about $14,400 to each of the twenty descendents.

We added other details. For example, we specified that if the receipient is under eighteen, their share would go into a trust fund for that individual child. Also, we decided that after fifty years, the family tree would likely be branched enough that it would be difficult to maintain, so at that point the entire remaining investment would be liquidated and shares of it would be paid out as above. This means, of course, that there could be a great grandchild in his forties who has received these payments all of his life without ever having met his great grandfather. Somehow, the old man rather liked that.

Obviously, this distribution isn’t enough to live on, but it certainly is enough to allow people much more freedom in their lifestyle choices. For example, if I had that sort of distribution coming in every year, I would probably go ahead and make the leap to being a full time writer.

Once we described the plan in full detail, I sent him to a lawyer to work out the details. I’m not the right person to put down the legal framework for this, so I connected him with a lawyer who could help iron out the legal details and put it down on paper. There are some decisions to still be made – who will be trustee and so on – but this is a framework that he’s happy with and will benefit his descendents for years to come.

I did feel relieved that I had just read Wealth a few days earlier, though.

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  1. boomie says:

    If the gentleman doesn’t set up a trust, the government(Fed & State) gets almost 55% of his estate, then the lawyers are paid, then the accountants, executors, probate court till finally whatever pittance is left is evenly divided. I know all this because my fathers estate was 6 million, he wouldn’t listen and well, when he died, I hope George Bush is enjoying my dad’s hard earned money. We kids aren’t.
    The inheritance laws are based on the fact that the inheritors didn’t EARN the money, so why should they get it. My dad did EARN the money, paid his taxes on it and it was his to do what he wanted to. The laws say otherwise.
    Live and learn.

  2. What a blessing you were for him, and for his family. This is beautiful.

    I love how he hid his wealth, how he plans to share it, and how you helped him achieve a plan.

    He is lucky to have found you.

    This post, the image it created and the ideas you shared, have made my weekend. Thank you.

  3. Kevin says:

    I thing that sounds like a truly great plan. I’m sure people will disagree though. For some reason just reading about it gave me a really great feeling. I like how it looks after an entire family for an extended period and truly leaves a legacy behind. The only thing I would do if I were him would be to set up some sort of hardship trigger for parents involving the children’s trust funds. Yes giving them huge chunks of money is great but if both parents are out of work for an extended period of time or the child endures an extreme medical emergency that causes financial disaster for the family a portion of the childs trust could be released to mantain at least basic living costs. Possibly even a stipulation where as all children under 18 who do not have health care premiums can be paid out of their trust.

    I also would never hand a trust fund over to an 18 year old, hopefully he is setting up some sort of tiered plan for the release of their funds over a few age points. I know at 18 if someone handed me $300,000 I would not have made wise choices with it. In fact I know a few people that wasted $250,000 trust funds on clothes, cars and living extravegantly for a few years.

  4. Chessiq says:

    I share JUGGLING FROGS’s sentiments. That’s all I felt- happy for him that he met you, and then the blessing that you are to people who meet you in person, and some of us who meet you through your blog. Awesome job, awesome post. I hope your (older)readership take it to heart and act on it. An estate that exists only in the mind is more of a curse than a blessing to those who you hope will benefit from it.

  5. H. Blythe says:

    If the trust is set up to be invested, you never have to touch the principle. There doesn’t ever have to be an end to the legacy if it is managed correctly. Then what you stated about distribution would apply to the investment results, not the primary investment amount.

  6. Sabrina's Money Matters says:

    What a very biblical way to leave your earthly existence…

  7. Kevin says:

    I think the point in ending it would be that after a couple generations it would get very convoluted trying to manage all the people who would get pay outs. Also inflation would slowly eat away at what those pay outs would actually be worth.

  8. Jim Lippard says:

    If it were my plan, I wouldn’t allow those who have lots of children to effectively dilute the income of those who don’t–I’d give equal shares to each descendant, which shares themselves are subdivided for each successive generation.

  9. susan says:

    This is a wonderful thing. I, too, felt just generally good reading what your friend wants to do (and is able to do!) for his family. Your suggestions about how to get it done were excellent and I think you’ve done him and his family a great service.

    You’ve done me one, too. My husband and I don’t have children and we expect that we’ll probably have some estate to leave in the future, but any time we’ve talked about what to do we’ve pushed off consideration of it because we don’t have a clue. (It’s the old “well, that’s in the future” schtick.) This idea provides a framework for us to think about how we might like to apportion our estate, to support the people – and in our case, the institutions and organizations – that matter to us.

    Great post!

  10. Mardee says:

    I’m sure you had really good intentions, but please don’t advise people on trusts when you haven’t studied the law. It drives me crazy when I get clients in who I have to talk out of some plan that is either impractical, ill-conceived or will cost them money down the road, just because some friend/relative told them that it could be done. You should have just sent him to a lawyer immediately – there are a lot of tax considerations and other problems inherent in dynasty trusts, and lawyers best know how to deal with them. Reading one book does not make someone expert enough to advise another person on setting up trusts…

  11. dave lamport says:

    is his last name lamport?

  12. I respectfully disagree with Mardee. Even an imperfect trust is far better than an $8 million unprotected estate going through probate. Most lawyers use a standard form for wills, living wills, and the like, then bill at their rates for work done by a secretary or paralegal.

    I do believe that Mardee and I would agree on this: Do your estate planning. Now!

  13. Lyndsey says:

    Mardee is right and Angie is wrong. An imperfect trust is not better than nothing – in fact, an imperfect trust could completely fail to be a trust, or fail to properly dispose of all of the trust assets, leading to that oh-so-terrible probate of all the funds (either under the will or through intestacy.) Besides that, if he has a will, his 8 million dollar estate is not unprotected when the will is probated. It is protected by the court and by the executor of will. I agree that non-lawyers should not be giving out advice on how to develop trusts (or wills). A trust is not a “standard form” that a paralegal could fill out, and a will for someone with assets as great as 8 million is certainly not a standard form will.

  14. rkt88edmo says:

    Yes don’t just use any lawyer, or a run of the mill estate and trust planner who spits out living trusts as the bulk of their work.

    8 million is enought that you would want to find an experienced high weath gift & estate expert that you can rely on.

    We are in a tricky time right now since the state of the estate tax isn’t really pinned down for future years. Please have them consult someone who knows tax.

    Also, will there be a trigger point, say if the distributions per person were to drop to $5,000 per person, it may make sense to liquidate the rest of the amount, as the administrative costs may be greater than the benefit.

  15. Peter R says:

    I agree with Jim, if he had 5 children and 15 grand children the after tax money should be split 5 ways (for each of his children) then each of those 5 parts should be split evenly between parents and children. If his children have grandkids and then great-grandkids they would only dilute their “branch”. In 50 years it’s likely that there are an extra 30 people getting money each year, why dilute the whole pool when some may only have 1 or 2 children and others may have 4-5?

  16. !wanda says:

    To Jim and Peter R: Because it’s not your fault if you have 4 siblings! Kids these days do not regularly give back to the older generation, so it wouldn’t really benefit the parents if 5 kids were getting trust funds vs. 2 kids getting trust funds. Doling out the money per branch only makes sense if you want to discourage your progeny from having children.

    Also, I don’t know what the guy wants to do about illegitimate children (is there such a thing anymore, legally speaking?), step-children, adopted children, etc. Family structures are a lot more fluid than they used to be. Really, consult a lawyer who is used to dealing with large estates.

    To the people who thought that Trent shouldn’t have had this conversation: Come on, the guy needed someone to talk to for free to flesh out what he would like his ideal trust to do. It’s not useful to go into a lawyer’s office with a blank mind. Now the guy has a tentative plan that the lawyer can build on or alter.

  17. MaddHatter says:

    I do believe the above post is onto something.

    And while above posts make it sound like maybe this is something you do need to take to the pros, with everything else in my financial life being self-service and working great so far, may I recommend an article on where one should/could store their estate assets? Just a thought.

  18. Margaret says:

    Certainly the gentleman needs legal advice about setting up his trust, but I think it is clear that the author was not attempting to give legal advice. What I read was that the gentleman had no idea how to distribute his estate. Good for him for looking around to get his own ideas in order before spending time with a lawyer. The man is managing an $8 million dollar estate that he accumulated himself; no doubt he has the intelligence to adjust his plan after receiving legal advice if some parts of it are unworkable.

    I think it is great that he wants to benefit all his family equally. Two of the comments speak about some people “diluting” the pool by having more children. So what? First of all, any money that family gets from him is a gift, and they should be grateful that he chooses to give them anything. Second, declining birthrates are a looming crisis in many countries. Good for those who are willing to take on the financial burden of having more children. Perhaps the gentleman recognizes that those with larger families also face larger financial commitments. Perhaps he doesn’t see children as some pest but as the future wage earning/tax paying/voting citizens who are going to be supporting you in your old age. Or perhaps he thinks of all his descendants as equally worthy, and sees it as unfair to set up a situation where 50 years down the road one great grandchild could be getting 1/30th share of his estate and another could be getting 1/120th share simply for having siblings.

  19. guinness416 says:

    For reasons I can’t quite articulate these stories of people living like paupers and accumulating huge estates always leave me sad. So many opportunities lost, experiences gone and decades of financial problems large & small within the family that could have been solved.

  20. Patrick says:

    It’s great that this man had someone to turn to who had no personal interest in the outcome of his money. Impartial advice is hard to find, and I think you gave that to him (which lead to a great piece of mind for him!). Thank you for doing the right thing giving him some very good advice. He and his descendants will thank you. :)

  21. I think I agree with leaving it equally doled to the children and not all descendents. It makes a difference in my family where I have no kids, my one brother has one and my other two sibs have 3 each. So if everyone got an equal slice it’s a bit unequal, especially with the likelyhood of my having kids in the future.

    But to each his own.

  22. EdTheRed says:

    I may be wrong, but I think there are some misconceptions about the Federal estate tax.

    First, estate tax rates (0% of the first three million dollars per married couple) currently top out at 45%, not 55%. As far as I now, those rates don’t even start to apply until an estate goes over that three million-dollar exemption. Again, I may be mistaken…if you have an IRS publication that states otherwise please post the link.

    Second, much of the wealth transferred at death has never been taxed. That’s because capital gains on assets like houses, stocks and bonds are not taxed until the asset is sold. If you are lucky enough to inherit a house or stocks and bonds, the nice dead person that left it to you obviously didn’t get a chance to sell it, so they never paid any capital gains tax on it.

    Again, I could be wrong, it happens all the time~!

    Ed

  23. plonkee says:

    I quite like the idea that everyone gets an equal share – maybe if I ever accumulate a fantastic some of money and want to distribute it then I’ll go this route. If you think everyone shouldn’t get an equal share but the direct descendants only (and then in proportion) thats also a perfectly good solution and when you have your huge sum to distribute, you can do it that way :).

  24. Elaine says:

    I have enjoyed each and every one of your columns since I discovered it a month ago. The only thing I was concerned about is the fact that most advice is for young couples or individuals less than 30 yrs of age. I am so happy to see that you helped this gentleman with his concerns. I am suggesting there needs to be more articles looking at individuals at 40 or 50 and how to accelerate their assets to prepare for retirement. I didn’t start saving until 20 yrs ago and at 50, I am a long ways from being where I want to be. Please consider this request for a future article. Thanks

  25. Michelle says:

    I think this money should only be distributed equally to currently living descendants. I would not have included a provision to give money to future generations who will never know this man except for his money. They will inadvertantly get a better life in general if their parents used it wisely to care for their future. But it is his money so he can do what he chooses.

  26. dong says:

    I hope everything works out great with this guy, and his kids and grandkids. It’s gonna be tricky, especially with grandkids if they’re young and learn they’ll be getting a distribution later in life. It might be blessing for some and a curse for others. Inheritance issues have a funny way of playing out sometimes.

  27. Bill says:

    I don’t see a problem with using Trent as a sounding board before meeting with an attorney.

    I applaud the guy for giving it away while he’s still alive – if he can structure it so that he can take advantage of the annual exemption then I think the heirs will get more than if the whole thing was distributed at death.

    Another thing people don’t consider about using a trust (even a run of the mill living trust) is the privacy it affords.

    Probate is a very public process – anyone who wants to can know exactly who the beneficiaries are, and target them if they inherit a large estate.

  28. Debbie says:

    It sounds like you had an interesting talk were able to come up with some creative ideas that the man likes. If you get to find out more, it would be nice to see an update based on extra advice the lawyer gives.

    I have no kids and my sister has four. I still think it’s cool to split it up evenly like that. And the man is tickled that some people who don’t know him will get some of his money. So that makes this a good system for him.

    Of course this money will help some people and not help other people. Because they are going to have free will on how to spend it. But (at least for the adults) they can only blow one year’s worth at a time. Some of the people will mature a bit during those years and be helped in the later years even if they weren’t helped in the earlier years.

  29. Rob in Madrid says:

    My wife and I don’t have children so we made our estate very simple. Every thing is to be divided equally amongst all our brothers and sisters. If they aren’t living there portion goes in equal portions to their children. Plain and simple. But I also don’t have to (currently) worry about estate taxes as we our wills will be probated in Canada and as we are currently non residents means we pay no capital gains tax. Canada doesn’t have a estate tax as such but instead death triggers a deemed disposition and is taxed accordingly.

    I’m impressed that he sought out advice as most people in his boat won’t do that.

  30. Everyone is reacting to the specifics of the advice. Here’s what I take away from this post:

    * The lived within his means for a lifetime, so his choices will outlive him.

    * The man applied his intelligence to his life and made a plan. Now he’s doing the same for his legacy.

    * The approach that allowed him to accumulate wealth (seeking advice, following his heart instead of doing what’s most commonly done, thoughtful planning) is facilitating the distribution of his assets.

    * How wonderful it is to look back on ones life, find success, and have the means and vision to share it. His generosity applies to both the wealth itself, and the wisdom of how it was accumulated, as evidenced by his not wanting to bestow a windfall on his descendants.

    Trent, that this wise man sought your advice, and the suggestions and approach you gave him, are both testimony to your integrity and good sense.

    May your friend live to 120 and only have joy from his children, grandchildren and their children.

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