Heirs Anxious to Inherit

The November 2000 Wyoming Supreme Court decision in Estate of Constance Louise Fosler deals with some of the psychological and emotional issues that can shape family money disputes. It serves as a cautionary tale for what can happen if you generate a lot of money but instill the wrong attitudes about wealth in your family members.

Constance Fosler died in December 1998, leaving an estate in excess of $19 million and no will. Her only surviving relatives were first cousins and their descendants. The question was how to fairly distribute the assets among the heirs.

The court construed state law to require distribution to the nearest living relatives (the first cousins) as the root generation per capita and to their descendants per stirpes.

In this context, per capita means all those who would receive an equal share of the family money; perstirpes refers to the children or dependents of each of the per capita people. The per stirpes beneficiaries get a subpart of a per capita share.

Any solution would rub some part of the family wrong. And this one, although plenty wise, did.
Daniel Fosler, a first cousin, ran the numbers and realized that he could get more of Constance’s money by pushing for a different distribution.

Daniel filed a lawsuit, proposing a distribution plan that would give him and his immediate family a bigger share than his cousins.

Once the case got some publicity, people started crawling out of the woodwork. In all, 26 relatives came forward to be recognized as the objects of Constances’s far-ranging view and funds.

When the court didn’t adopt the distributing method that would have given Daniel the most money, he appealed.

Although Daniel took the most visible position of Constance’s heirs, he wasn’t alone in taking aggressive
measures to collect the most that he could. All of the heirs were aligning and positioning themselves with some and against others. It was a kind of Darwinian competitive ritual.

Daniel’s appeal finally ended up in the hands of the Wyoming State Supreme Court, which had to apply some dusty law to the group of conniving heirs.

The court had to scrutinize the laws referring to people who die intestate, and it had to determine the practical meaning of those laws’ language.

The court noted that neither the word cousin nor cousins appeared in the statutory language. So, Constance’s cousins could only take by representation as descendants of the uncles and aunts.

The court ultimately agreed with Daniel’s interpretation because “grandfather, grandmother, uncles,
aunts” were specifically named in the state law. This changed hundreds of thousands of dollars in inheritance among Constance’s relatives. And it meant Daniel had prevailed in the Darwinian battle.

The Wyoming Supreme Court admitted that its decision might seem harsh to some observers:

...we recognize that many state legislatures have adopted intestacy provisions which identify the root generation as the nearest generation with living members. However, our 131-year-old statute and case law do not support such an interpretation. ...Although some may perceive this result as being unfair, others may well conclude that the statute accurately reflects what the majority of people would intend. However, we cannot revise the statutes through interpretation to satisfy our individual views of contemporary family ties and equitable distribution.

Keep this statement in mind when you think about building family wealth. In many ways, saving and maintaining the money is the easier part raising family members who understand and agree with what you want to do is harder.

If you count on the courts...or God...or fate to distribute money, there’s a good chance your heirs will end up battling each other for every additional dollar. And the courts may begrudgingly refer to ancient laws that reward the pushiest partisans.

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Curing Bad Spending Habits

Most of us have at least a few bad spending habits whether we are inclined to be spenders or savers.
In many cases, a lack of experience with daily costs of living leads to a certain level of volatility, which makes steady savings difficult.

What follows is a review of some of the worst, but most common, spending habits that screw up people’s financial lives. Check your own habits against these patterns. Pay close attention to the solutions discussed and take control.

Buying on credit is probably the worst habit you can have. If you have it, you shouldn’t feel alone. American consumers have more short-term, unsecured debt than any other group on the face or in the history of the planet.

People who avoid using credit are sometimes seen as cranks or eccentrics people who aren’t willing to play by the conventional financial rules. But there’s a lot to be said for avoiding revolving consumer debt.

Borrowing money to buy things that lose value over time means you lose twice once in the interest costs of borrowing the money and twice in the lost value (depreciation is the accountant’s term) of the thing you’ve bought.

Consumer lending is designed to lull the consumer namely, you into a false sense of financial security. That’s why Circuit City, Bloomingdales and Nordstrom are happy to issue store credit cards. But credit cards are the worst form of borrowing.
Once they’ve encouraged you to spend beyond your current means, they charge you anywhere from 15 to more than 20 percent interest.

Break this habit by not buying anything on credit except your education, your car or your house. Everything else should be paid in cash or paid off when you get the credit card bill.

Keeping up with the Joneses is another bad habit. Thanks to a natural competitive instinct and billions of dollars spent every year by advertising geniuses,we have been brainwashed into judging ourselves by whether we have the same material goods as our friends.

This is the familiar rat race of consumption more money to support a fancier lifestyle which then requires even more money. And that word lifestyle doesn’t just mean buying fancy cars and beach houses. It applies to just about anything: the amount of time you spend on the Internet; the number of times you see your favorite band in concert; the food you eat, booze you drink or clothes you wear.

Keep your mind on the long-term goal: Building and maintaining wealth that will last for generations after your gone.

Buying without goals is the bad spending habit that even careful people can suffer. For many people, making a good salary or inheriting some money means feeling that they have to spend it to show they’ve got it. This is the flip side of the debt problem and a variation of the status issue.

Rethink your personal and financial goals. In other words: Start saving more. In an economy that laughs at old notions of career stability, no one is doing well if the main source of income is a salary.

Most people are fairly average financially that is, they don’t make that much more or that much less money than other people their age. It’s just that some people are better at using their money to reach their goals.

What should your goal be? Go back to your monthly detail and look at how much money you put into savings. Is it 15 percent of your income? It should be. If it’s not...there’s your goal.

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Keep Detailed Records

There are long books dedicated to the practice of making household budgets. We suggest a mechanically simple process for checking your finances. To start, buy a small receipt book. A notebook will work...a day-planner is great. Also, buy one
packet of blue pens and one packet of red ones. Keep one red pen and one blue pen with your receipt book at all times. Second, for one month, collect receipts for every dollar you spend. From whatever tomorrow is to that same numbered day next month, ask for a receipt or make one for yourself every time you hand anyone cash, a check or a credit card. Third, tally your expenses. Put the receipts in the receipt book at least once a day. Using the red pen,

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list the expenses amount, date and party paid in the book at least every other day…in a clear, chronological order. Include everything from the 50 cents you gave your daughter for an ‘NSync sticker to the $2,500 check you wrote for this month’s mortgage payment. Include deductions taken from your paycheck...and note the fees added to things like
mortgage payments. Fourth, make a note in blue of every deposit you make into your bank account (if you have multiple accounts, focus this effort on whichever one you use primarily). Count every kind of deposit in this list salary, bonus, dividends, transfers from other accounts, loans from college friends, money from your aunt. Try to keep the deposits in chronological order with the expenses...but don’t sweat it if the order gets a little mixed up. The main point is to
include everything. Keep these records for the full month. Resign yourself to being an anal-retentive bean counter. At the
end of one month, it’s time for analysis. The main question: How do the blue total and red total compare? Don’t be surprised if the red total is larger. This is usually explained by credit cards, lines of credit and interest expenses. If you net out payments (usually by check) to consumer finance companies, you should end up with numbers that come close to matching.

A caveat: If credit card charges account for more than 20 percent of your total expenses, you’re probably using the things too much...and should be cutting back.

Once you’ve balanced the account, you can begin to characterize the ways you spend your money. Go back through your list of red expenses and give each expense one of the following numeric codes:

1 Shelter. This includes rent on your studio, mortgages on your homes. Insurance. Furniture. Repairs and maintenance. Utilities. No taxes—they go in their own category.

2 Transportation. This includes car payments, car insurance, gasoline, repairs and maintenance. Bus or train fares, the chauffeur’s salary. The ’66 Triumph you’re spending weekends restoring probably fits somewhere else.

3 Food. This includes groceries and kitchen-related expenses like water service, etc. This should not include the costs of eating out, though some people count prepared food they bring home. It should definitely not count discretionary items like gourmet coffee on the way to work each morning.

4 Health. This includes health insurance premiums, if you pay them yourself or they are deducted from your pay

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check (the paycheck stub should break out the details). It also includes copayments or deductibles that you pay out of pocket, money you spend on drugs prescription or not, and expenses for seeing chiropractors, therapists or anyone else who tends to your well-being.

5 Education. This includes the costs of your education or your children’s. Student loan payments, tuition, school supplies (including uniforms, afterschool activities or day care expenses).

6 Taxes. This includes everything you pay directly to the federal, state or local governments. Include income taxes withheld from your paycheck (and itemize that, breaking out federal, state and other, if you like). Also include property taxes that are impounded (that is, included) in any mortgage payments. Leave out sales tax for this exercise.

7 Retirement planning and savings. This includes contributions to retirement plans tax-advantaged or not; and money that you deposit each month into a savings account. Again, you may have some of these expenses deducted directly from your paycheck so look at that stub.

8 Recreation. This will be the first of several broad categories. It should include things like health or country club memberships, athletic equip ment, hobby supplies, collections, etc. Most people who use this system include travel and vacation expenses in this category. The ’66 Triumph and its attendant expenses probably goes here.

9 Entertainment. This includes eating in restaurants; drinks with friends; concerts, plays, sporting events or movies; videos you rent, books, magazines or newspapers you buy. It also includes gourmet coffee, lunches, online computer services or memberships, etc.

10 Clothes. Everything that you wear whether functional or outrageous goes here: work clothes, weekend clothes, funky thrift-shop coats, Armani tuxedoes, Nikes. Most jewelry. Dry cleaning and tailoring.

11 Communication. This includes your home phone bill and importantly any cell phone bills. Also, you probably should include things like home DSL lines and/or Internet service fees, answering services, if you use them, pagers, phone hardware, etc.

12 Religious and charitable donations. This may include cash contributions and pro-rated commitments (for example: one-twelfth of an annual gift that you’ve promised). The prorated commitment may be a little tough to calculate; keep it to actual pledges that you’ve made. Usually churches or

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charities will send you some kind of paperwork describing the commitment.

13 Interest and finance charges. This includes interest on consumer debt credit cards and the like. It should also include bank fees charged to your account and finance charges for things like cash advances and specialized transactions. It includes late fees for tardy payments. You don’t need to include interest on things like mortgages or margin loans...though some people do. You may feel that particular expenses deserve their own categories, or that these 13 categories don’t do justice to your complicated life. But the purpose of this exercise is to make basic conclusions about where your money goes. Most people spend roughly:

• 35 to 40 percent of their net income on shelter

• 10 to 15 percent on transportation

• 10 to 15 percent on food

• 10 to 15 percent on medicine and health

• 5 to 10 percent on savings

• 5 to 10 percent on recreation

• 5 to 10 percent on entertainment

• 5 to 10 percent on clothes

• 5 to 10 percent on education and daycare

• less than 5 percent on communication

• less than 5 percent on charitable donations

• less than 5 percent on finance charges Use this list as an indication of trouble areas. If one item is way out of range, it may be a problem. Pay particular attention to the items near the bottom of the list. The expense categories that surprise more people are communications, entertainment and interest/ finance charges. If any of these are more than

10 percent of your monthly spending, you probablyneed to cut back. This exercise isn’t intended for people with urgent
money problems. Make gradual, lasting adjustments rather than radical change.

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The Effects of Compounding

Although there may not be any profound moral distinction between spenders and savers, savers have

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one key tactical advantage over spenders. They tend to be on the winning side of compounding. Compounding is the most important financial tool you can use. In short, it is the progressive effect that earning interest (or, on the other hand, paying
interest) has over a long period of time. It’s like putting two rabbits in a room and coming back to find that they’ve multiplied to 20. The longer you’re out of the room, the more rabbits you get. Money works the same way. If you put it in the right place and give it time, it will multiply.

For the saver, incremental growth is the key to accumulating wealth. Usually, the effect of compound earnings over 20 or 30 years of steady investment will mean as much if not more than any individual investment decision.

For the spender, the flip-side advice is: Avoid debt. Compounding can work against you as steadily as it can for you. The paths to many personal bankruptcies are paved with finance charges. And financing finance charges. If you’re moving balances from credit card to credit card...or to equity lines or other loans...stop financing new purchases. Take the credit cards out of your wallet. If you don’t trust yourself even then, cancel all but one or two accounts or pay cash. If you’re able to put away some true savings (after you’ve paid off your consumer debt) at the end of each month, congratulations you can skip the next few pages.

If you don’t have enough money to pay your bills at the end of each month, or if you want to save more than you are now, there are only two ways to fix your problem: make more or spend less. Earning more is tough and usually relies on external factors (the job market or investment market). Spending less is the best way to improve your financial health. First, ask yourself: Where does all of your money go?

Answering that question takes a bit of work, but it’s a key step to building family wealth.

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A Touch of Aggressiveness

Instilling the right attitude about family money in your family members requires a certain aggressiveness about using resources and financial devices. The January 2000 Louisiana Appeals Court decision in William Brockman v. Salt Lake Farm Partner

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ship et al. shows how one family thought creatively about using trusts to a practical end. And, despite the courtroom losses that it suffered, the family’s attitude toward using family money influenced others. Salt Lake Farm Partnership was a hunting club, formed as a corporation in the late 1970s when Travis Oliver purchased a 3,200-acre tract of land. Oliver assembled 10 other men, all avid hunters, to acquire the land and develop it for hunting. Each of the original members, including Ralph Brockman, put up $20,000; the club financed the balance of the $1.8 million purchase price. Sometime prior to 1982, Ralph Brockman transferred his share to a trust on behalf of his two sons and named his brother, William Brockman, trustee. In 1982, the Salt Lake corporation restructured as a partnership. In addition to hunting dues, each
partner was liable to make an annual capital contribution or capital call of up to $20,000; but, upon unanimous vote of the partners, a capital call of more than $20,000 could be required. On the club’s books, these contributions would be kept in a partner’s capital account. The Articles of Partnership stated that, if a partner failed to meet a capital call, “the Partnership shall liquidate that Partner’s interest.” Upon liquidation, the partner would get back 70 percent of his capital account, with the balance forfeited to the partnership. During the 1980s, Oliver purchased 80 acres of land to the north of the Salt Lake tract. Although

Oliver didn’t grant a lease or right-of-way to the club, he allowed members free use of his adjacent tract for ingress and egress. This became the main thoroughfare to the club’s property. Incidents in other business dealings between Brockman and Oliver were straining their relationship by the late 1980s. By 1991, some partners had withdrawn from Salt Lake, reducing the number of partners to seven. This was also when the club’s bank loan was due to expire so, the partners would have to refinance. In order to refinance, a $60,000 capital call was necessary. Final vote on the matter was set for a meeting in September 1991. Prior to the vote, Ralph Brockman called and sent memos to partners, expressing his dissatisfaction with the direction Salt Lake was taking. He wanted a formal, permanent right of way across the Oliver property as a precondition to voting for the refinancing. Oliver assured him this would be arranged. Neither Ralph nor William Brockman was able to attend the September 1991 meeting; after receiving official notice of the meeting, Ralph gave a written proxy to another friend and Salt Lake member. The friend cast the Brockman Trust’s vote in favor of the capital call, which passed unanimously. William Brockman received formal notice of the capital call on October 3, 1991; Ralph, who’d been traveling, received it a few days later. But Ralph wasn’t content with how things had gone while he’d been away. He felt that the lease Oliver offered the

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club for the access road didn’t meet his demand for a permanent right-of-way. Ralph offered to pay only $30,000 from the trust on the capital call. In November, Salt Lake offered Ralph $78,000 for the trust’s capital account. He declined the offer. Salt Lake terminated the Brockman Trust’s interest on December 11, 1991. William Brockman filed a lawsuit against Salt Lake, Oliver and several other members in January 1992. The trust sought 70 percent of its capital account and other expenses. Alternatively, on the theory that the termination was invalid, the trust asked for a judgment dissolving the Salt Lake partnership. The case went to trial, and through the testimony of the Brockmans, the Brockman Trust made the following arguments:

• Consent to the $60,000 capital call was invalid because a proxy had been granted by Ralph Brockman, who was
not the trustee.

• Consent was also invalid because the trust’s vote was specifically conditioned on acquiring a permanent rightof- way across the Oliver Tract.

• After the September 1991 meeting, Salt Lake did not promptly mail meeting minutes to the Brockman Trust, thus keeping it in the dark and denying it the ability to act more quickly to protect its interest.

• Salt Lake undervalued the Brockman Trust’s capital account.

Because Ralph had consistently voted the partnership shares that were owned by the trust, the trial court had a hard time accepting these rather sly points. It issued directed verdicts rejecting all the Brockmans’ claims. They appealed. The appeals court wasn’t much more sympathetic. It ruled that reasonable jurors would have inevitably concluded that William delegated legal voting authority to Ralph, and that Ralph therefore had the apparent authority either to cast this vote himself or grant a proxy to a trusted friend and partner. The appeals court did rule in favor of the Brockman
Trusts on one count. It wrote: Even though the trust failed to prove fiduciary breaches, intentional misdeeds and the
right to be reinstated into Salt Lake, it showed that upon termination it was owed 70 percent of its capital account. The trust introduced sufficient evidence to cast doubt on [Salt Lake]’s final calculation. So, the trust could make the case for a larger reimbursement from Salt Lake. Despite Ralph Brockman’s untenable claims, he had been smart and aggressive about putting his partnership shares in the trusts for his sons.

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Attitudes and Aptitudes

You’ve considered your notions of family and made some basic decisions about who’s in that group. The next step in effective planning is to do some critical thinking about what kind of person you are and what kind of people your family members are in terms of money management. And don’t just laugh this off by saying “broke” or “incompetent.” The purpose of this step is to make decisions about managing family money that are realistic, given your own tendencies and those of the people who’ll inherit your family’s resources.

With members of the World War II generation passing their assets to Baby Boomers...and the Baby Boomers, in turn, passing assets to their children, more money will pass from one generation to another in the first half of the 21st Century than the rest of American history combined.

No matter how unprepared you may feel, you’re going to pass some kind of financial legacy onto your loved ones. It might as well be well thoughtout. Managing family money, like parenthood, is a responsibility that often forces self-centered people to become less self-centered. So, you need to ask yourself: What kind of money person am I? To prevent this question from spinning out of focus, consider how your finances relate to each of the following common issues:

• Timeliness. Do you adjust your plans with the birth of children and grandchildren; sale of a business, home or
other large asset; marriage or divorce, death of a family member; change in guardian or relocation? Any of these everyday facts of life can render your financial plans out-of-date.

• Organization. Do you have a detailed inventory of what you own, what you owe and where accounts or assets are
located? Wills and trusts often include these inventories; but they can become obsolete as circumstances change. That’s why smart planners keep separate asset inventories...and update them at least once a year.

Make sure everything is on the list—cash, liquid investments, business interests, loans or notes, real estate, collectibles, personal papers, etc.

• Clear (or clearly-defined) title. Do you know precisely who owns the assets in your estate? For example: How is the title to any real estate structured? Are you the sole title holder? Are you a joint tenant with a spouse? These matters control how the assets are transferred.

• Communication. Do your family members know what you want? Many problems arise because beneficiaries or distributees (the heirs getting the money) don’t know what the grantors (people leaving the money) wanted.

The confusion may begin before your death, if you become incapacitated. This is why living trusts are useful; they state how you wish your affairs to be handled if you can’t speak for yourself. Without something like this in place, you may force family members to make quick, unprepared decisions about your medical care...and the family’s resources.


• Beneficiary designations. How you define who gets family money can become an issue itself. Part of this is mechanical:
Naming a revocable trust as a beneficiary will usually force accounts to be liquidated and subject to income tax after you die. Part of this is personal: Naming specific heirs often means someone doesn’t like the result.

• Life insurance. Simply buying a policy with an X dollar benefit isn’t enough.

Setting up the right structure can almost double its value. If you name your spouse as beneficiary, proceeds will go to him or her tax free at your death because of the marital deduction but any money left will be taxed at your spouse’s death. If you transfer ownership of the policy to an irrevocable trust while you’re still kicking the proceeds will go to the trust when you die...and it pays less tax (usually).

• Gifts. One of the smartest ways to transfer money is to give it to family members slowly and steadily. You can give up to $10,000 per year to any person free of gift tax. (If you’re married, each spouse can give $10,000.) Some people are hesitant to do this because they think it means losing control. It doesn’t have to; but it will require financial discipline over a long time...so you hope. We’ll consider all of these matters in more detail as we proceed through this book. The point of this exercise is to help you realize what kind of money person you are. Have you made plans that deal with the seven issues we just described? If you answered “yes” to all seven, you’re a conscientious planner who’s already ahead of the game; if you only answered “yes” to one or two, you don’t like thinking about money and you need to start. There are two kinds of people: accumulators of wealth and distributors of wealth. The two are simply different sorts of people different attitudes and

inclinations. Accumulators are savers and planners by nature. Distributors spend more than they save. Of course, there are exceptions to that solute stance. It seems more accurate to say that different people at different stages in life may be savers or spenders. It’s certainly easier to accumulate when you’re single and unencumbered than when you’re putting
a couple of kids through college. And even incorrigible distributors of wealth want to leave their worldy goods to the people they care about most. After all, someone who’s spent more than he or she has saved over the course of a lifetime
should have a lot of cool stuff.

You can be a spender and a planner. In fact, if you are a spender, you need to make a concerted effort to plan...precisely because it may not come naturally to you. If you’ve never done anything about any of the issues we described in the previous couple of pages, reread those pages. There will be more information about what to do about each topic in the coming chapters.

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Lines Blur in Many Way

Joe Smith’s assumptions about having a role in his brother’s estate or Betty DiAngelo in her first husband’s show that the “ubiquitous change” in the social meaning of family isn’t only about falling apart. It’s also about non-traditional coming together. In a time of less certainty, some people will assume family ties that don’t exist. The February 2000 Delaware state court decision Susan Wagner v. Gordon Hendry involved yet another variation of assumed familial ties. Briefly stated, the parents of a young man decided to help out and facilitate the purchase of a home for their son and soon-to-be daughter-in-law. They made several business arrangements under the assumption that Susan Wagner, their son’s fiancé, would be a part of the family. But when Susan called the engagement off and moved out, those business transaction became a source of legal trouble. Susan wanted her share of the down payment back, and had to drag her case to court. She eventually got some of the money back, but it wasn’t easy. The deal had simply been too complicated and too conditional to do anyone involved good. Susan Wagner and her potential in-laws had agreed to a business deal that would have required a lot from family members and they weren’t family.

C O N C L U S I O N
The purpose of this chapter has been to offer you some tools for thinking clearly about what your family is...and who belongs in it. We’ve also tried to show how strict and conservative a view most financial institutions, laws and courts take in defining “family.”

Again, it’s important to stress that the law’s strict constructions aren’t just part of some political agenda. They go deeper than that. More than most people would like to admit, families exist to channel resources (cultural, intellectual and financial) smoothly from one generation to another. It serves little purpose to rant against hard rules. The strict constructions of “family” in money matters are facts of financial life that must be recognized and dealt with effectively. The rest of this book will concentrate on strategies and tactics for doing so.

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