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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