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.

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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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Divorce and Money

There’s no doubt that the social changes of the second half of the 20th Century brought about important changes in the way people live. Many social critics argue that one of the key changes has been more liberal attitudes toward marriage and divorce. The easing of legal barriers and social stigma allows people to get out of bad marriages more quickly. On a social and psychological level, easier divorce may be an improvement in the way people live. But on a financial level, divorce remains a major problem. It has been well established that divorce creates financial hardship for everyone involved, but especially for women and young children.

This hard reality reflects some little-realized legal and financial facts namely, that marriage exists primarily in legal and financial contexts as a conduit for transferring wealth from spouse to spouse, and from parent to child. Although divorce is well established in the law, it still makes smooth transfer...not so smooth.

The May 2001 Delaware Chancery Court decision Doris Mitchell v. Betty DiAngelo offers a good example about how deep this instability can go. And how long it can last.

Carl Jones and Betty DiAngelo were married in 1951. They had no children together. In June 1968, Betty sought a divorce in order to marry another man. Carl’s attorney arranged for her to go to Alabama, where she obtained a written divorce decree dated June 28 and signed by an Alabama judge named F.O. Whitten. She married her second husband
in Georgia the next day. Shortly before she left Delaware for Alabama, Betty signed a written agreement with Carl that stated his payment to her of $5,000 would be a complete settlement of all of her rights to their marital property.
He got the home, and by August 1968, Carl was identified as a “divorced man.” Betty and her second husband lived together until his death in 1987. Betty then began to collect Social Security benefits and a veteran’s pension as that man’s widow. She married for a third time in 1990 but that marriage ended in divorce a year later. Carl never remarried and had no children. He died without a will in early 2000. When Betty learned of Carl’s death, she calculated that she would be eligible to receive higher Social Security benefits as Carl’s surviving spouse than she was receiving as her second husband’s surviving spouse. She applied for an adjustment with the Social Security Administration. As part of the adjustment, the Social Security Administration asked for a copy of the Alabama divorce decree. When Betty wrote to Alabama for a certified copy of the divorce, she discovered that

the state had no official record of her divorce from Carl and that Judge F.O. Whitten had been imprisoned for issuing fraudulent “quickie” divorces. Suddenly, Betty had a whole new legal strategy to pursue. She filed legal papers in Delaware, claiming right to 100 percent of Carl’s estate as his widow. She argued that, because the divorce decree was void, her subsequent marriages were also void. And that she was Carl’s wife when he died. On the other side, Carl’s family members (led by his sister, Doris Mitchell, who was the administratrix of his estate) argued that Betty should be prevented
from denying the validity of the Alabama divorce and her later marriages and, thus, from inheriting Carl’s money and property. Furthermore, Mitchell argued, the Property Settlement Agreement Betty and Carl signed as she was leaving served as a release of all of Betty’s claims against Carl’s estate. The Delaware court agreed with Mitchell. In its ruling, the court pointed to The Uniform Probate Code, which provides that: a surviving spouse does not include (1) an individual who obtains or consents to a final decree or judgment of divorce from the decedent or an annulment of their marriage, which decree or judgment is not recognized as valid in this State...; (2) an individual who, following an invalid decree or judgment of divorce or annulment obtained bythe decedent, participates in a marriage ceremony with a third individual; or (3) an individual who was a party to a valid proceeding concluded by an order purporting to terminate all marital property rights. Put simply, the court held that subsequent marriages compromise a person’s status and right to make a claim on the estate of a previous spouse even if there has been an invalid divorce. The court said: ...ubiquitous change in public attitude toward divorce in the last half century, and the vastly different set of laws now in effect in this and other states, is reflected in more modern opinions in the area. In making its decision, the court pointed out the unique and troubling aspect about Betty DiAngelo’s claim: She had waited more than 30 years and until Carl had died—before she asserted any claim to a greater share of their marital property.The court wrote that there would be a fundamental unfairness if Betty were allowed both to ignore her divorce and remarriage and to avoid the effect of her agreement to renounce her statutory right to Carl’s estate. She had lived her life since 1968 as though she were divorced from Carl and fully enjoyed the benefits of that divorced status. Now that Carl was dead and her marital duties to him had terminated extra-judicially, it was too late for her to assert her rights as his spouse. In the court’s final words, “...between Betty and Carl, equity and good conscience dictates that they be left where they put themselves...in 1968.”

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Down , Not Sideways

Even people whose families have a traditional structure are occasionally surprised with an inheritance decision that goes against their plans. So, no one can afford to be thoughtless about their estate planning. In most states, probate law assumes a much more limited notion of what “family” means than people who get their legal training from television shows might guess. The August 2000 Oklahoma Appeals Courts decision in Estate of Dale J. Smith dealt one person a familial shock.
Dale Smith and Joe Smith were brothers. Jim C. Smith was Dale’s only child. Dale and Joe owned a total of approximately two-thirds of the shares of stock of Wood Oil Company, an Oklahoma corporation. Together, they had controling interest in the company separately, neither owned enough shares to control.

The brothers had signed a shareholder’s agreement essentially a contract between them that stated certain terms under which they had purchased and would keep or sell their shares. Joe claimed that these terms included an option for him to buy Dale’s Wood Oil shares in the event of Dale’s death.

When Dale died in 1999, his son Jim was named personal representative (Oklahoma’s version of an administrator) of the estate. So far, that was fine.

The trouble started when Jim told his uncle that he wasn’t going to sell his father’s shares in Wood Oil. Joe filed a lawsuit contesting Dale’s will. Jim asked the court to dismiss his uncle’s contest on the ground that Joe was not a “person interested” in the estate, as required by law. On the other hand, Joe’s theory was that, because his brother’s will granted Jim the power to sell his stock, Joe’s rights under the shareholder’s agreement were violated. This made Joe a “person interested.” The probate court noted that, although “[a]ny person interested in a will may file objections... determined by the court,” not every person is a “person interested.” That was for the court to determine. The court which was limited in its scope to considering the issues related directly to Dale’s estate couldn’t find anything in the estate documents that
suggested his brother had an option to buy his Wood Oil shares. In fact, it didn’t find anything that gave Uncle Joe any legal standing in the estate. Oklahoma law granted status instantly to spouses and children but didn’t give any special legal position to siblings of people who’ve died. It agreed with Jim and denied Joe’s contest. Joe appealed, arguing that the shareholder’s agreement he and Dale had signed should be included in the estate. This argument failed to convince the appeals court. It concluded that Joe would have to sue Dale’s estate separately: Whether Joe or [Dale’s son] is successful in the independent action relating to the va

lidity of the stockholder’s agreement is not material to this appeal. Dale’s stock in the oil company is a part of the property of the estate. That stock is subject to the restrictions contained in the stockholders agreement, if it is valid. Otherwise, those restrictions will not be enforceable. This is somewhat similar to the rights of a creditor whose
claims are disputed. So, Dale’s will would stand. As far as the probate court was concerned, the Wood Oil shares were property like any other property and Jim was in charge of what would happen with them. To support its ruling, the appeals court referred to the 1933 Oklahoma case McVoy v. Lewis, in which a surviving sister, nieces and nephews contested a dead woman’s will. The will granted all of the decedent’s property to her grandchildren, because she had outlived her own children. When the case reached the Supreme Court of Oklahoma, the court made the following points:

1) the only persons who may contest the probate of a will are persons having an interest in the estate of the deceased;
2) in its legal sense...“issue” means descendants, lineal descendants, offspring; and
3) in [Oklahoma] statutes, grandchildren, being lineal descendants, inherit to the exclusion of a sister, nieces and nephews of the deceased.

This is why many lawyers wearily chant “inheritance flows down, not sideways” when extended family members want to raise legal complaints. Unless

they are specifically named in a will, trust or other legal document, siblings, cousins, in-laws and the like are not considered “family.”

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Old - Fashioned Notions

The lawsuits and legal battling that took place within the family in the years after Seward Sr. set up his trusts make some people glad that they don’t have as much money and as many problems as the Johnson & Johnson heirs.

This may be part of the reason that some very rich people most notably, investor Warren Buffett and software mogul Bill Gates have said publicly that they intend to give most of their billions to charity. They want to avoid the generations of money battles that have beset families like the Johnsons.

But most people don’t have so much money to worry about. And they do want to leave what they have to children, grandchildren or other family members without creating small-scale versions of the Johnsons’ problems.

The main lesson learned from the fight over Cookie Johnson’s legitimacy is that legal status matters a lot when it comes to money matters. Although American society judges out-of-wedlock births less harshly than it did before the 1960s (there’s less “social opprobrium,” as the New Jersey Supreme Court called it), the fact remains that outof- wedlock or illegitimate births do make money issues more complex.

When out-of-wedlock births occurred primarily among poor people, these complexities didn’t much matter. But, as single-parenting becomes more common among middle-class and wealthier people, the problems become a bigger issue.

This is tough work. It’s easy for television writers to make fun of social conventions and single motherhood in a show like Murphy Brown. But real life deals with harder truths. Not all single mothers are as wealthy as that TV show’s lead character and, in the real world, children born outside of marriage have no immediate status as heirs of their fathers. This was part of the reason the New Jersey Parentage Act was designed to support children trying to establish paternity not deny paternity, as Cookie Johnson’s cousins were trying to do. Not all fights over legitimacy involve hundreds of millions of dollars. More often, courts have to grapple with more mundane families and more ordinary financial matters. The January 2001 Ohio Supreme Court decision Estate of Vaughan dealt with more mainstream but no less agonizing facts. The case actually started 20 years earlier. In 1980, Deborah Ferrante filed a paternity suit against William R. Vaughan in juvenile
court. Ferrante wanted to establish that Vaughan was the father of her daughter, Angel Vaughan. At a hearing in October 1980, Vaughan entered a plea denying that he was Angel’s father. Several months later, in early 1981, Angel’s parents reached an agreement about the child. Vaughan entered a plea acknowledging paternity. Based on this, the juvenile court determined Vaughan was Angel’s father and ordered Vaughan to pay Ferrante expenses for pregnancy and childbirth as well as previous and current child care costs.

Vaughan died in May 1981. As a result, the juvenile court entered an order canceling its award of child care maintenance and support costs to Ferrante. In July 1981, Vaughan’s mother, Jacqueline Bradshaw, filed an application to administer her son’s estate. She identified Angel and herself as heirs to Vaughan’s estate. The court appointed Bradshaw as administrator and ordered that a fiduciary’s bond be posted. Safeco Insurance Company of America, as surety for Bradshaw, provided bonds in the amount of $71,000.

Surety bonds play a big role in estate management especially when the estates are complicated. In short, a surety bond is a kind of insurance policy against mismanagement or malfeasance related to monies that may be distributed among several people. Courts require these bonds in certain situations.

In September 1981, Ferrante filed paperwork requesting that the probate court appoint her as Angel’s guardian for the purposes of negotiating with Vaughan’s estate. This was normal procedure. Then, in March 1982, she didn’t want to be the guardian anymore so the probate court terminated the guardianship. A few days after that, Bradshaw Vaughan’s mother asked the probate court to amend the list of heirs, making her her son’s sole heir. Vaughan’s estate was quickly settled and the probate court discharged Bradshaw and Safeco.

Did Ferrante and Bradshaw make some kind of deal to remove Angel from the estate? The court papers, of course, didn’t say anything about that. But it would seem to be a logical inference.

Almost 16 years later, in May 1998, Angel Vaughan having reached legal adulthood filed a motion to reopen the estate of William Vaughan. She petitioned the probate court to vacate its judgment of March 1982, amending the list of heirs. She also asked the court to hold Bradshaw and Safeco liable for monies that should have been paid to her. The probate court rejected Angel’s motion. So did a trial court. She appealed and the Supreme Court of Ohio agreed to consider the case. The supreme court’s main issue: whether a juvenile court admission of paternity is the equivalent of a probate court legitimation. In other words: We are asked to decide whether William Vaughan’s juvenile court admission of paternity conferred rights of inheritance upon and thereby established her as the sole heir of Vaughan’s estate. Angel claimed that Vaughan’s open-court admission that he was her biological father resulted in the establishment of the natural parent-child relationship, which would vest her with rights of inheritance by and through him.The supreme court disagreed, and noted those circumstances under which a child born out of wed

lock could inherit from the natural father. Those circumstances included:
1) when the natural father designates the child as his heir at law;
2) when the natural father adopts the child;
3) when the natural father provides for the child in his will;
4) when the natural parents of a child born out of wedlock marry; and
5) when the natural father, with the consent of the mother, formally acknowledges in probate court that he is the father of the child.
William Vaughan had done none of these things his admission in juvenile court didn’t meet any of the law’s requirements.
The Ohio court held that Vaughan’s admission of paternity during a juvenile court proceeding didn’t constitute a legal admission of parent-child relationship “sufficient to vest [the] child with rights of inheritance.” Angel was out of luck.
Clearly, the law can be pretty harsh when it comes to determining who’s family. That’s why it’s important especially for people with blended or nontraditional families to make a clear statement of inheritance. And, as we saw in the Charles Bronson case, this doesn’t have to be a formal legal document. (We will consider the mechanics of wills in Chapter 3.)

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The State Parentage Act

In 1983, the state legislature had enacted the New Jersey Parentage Act, which established the principle that “regardless of the marital status of the parents, all children and parents have equal rights

with respect to each other.” It was also intended to provide a procedure to establish parentage in disputed cases. Specifically, the statute states: A man is presumed to be the biological father of a child if...[h]e and the child’s biological
mother are or have been married to each other and the child is born during the marriage, or within 300 days after the marriage is terminated....The state supreme court noted that, as indicated by the legislative history, “[t]hese presumptions are intended to facilitate the flow of benefits from the father to the child.”

The presumption of legitimacy is one of the strongest rebuttable presumptions known to the law.
Most courts require that it be honored unless overcome by what the New Jersey court called “the strongest
sort of evidence.”

With that established, the court ruled: We agree with the trial court that the Parentage Act essentially forecloses a thirdparty attack on [Cookie]’s parentage. The Act broadly accepts proof of paternity as “adjudicated under prior law,” as well as in a host of other settings.... Nor are we persuaded that the doctrine of probable intent requires a contrary conclusion or further proceedings.

Probable intent is a concept that courts apply to trusts or contracts whose wording is unclear. But the state supreme court ruled that this wasn’t so in the Johnson case.

The Ryans argued, Cookie’s exclusion from the 1963 trust indicated that Seward Sr. did not intend her to be a beneficiary of the 1961 trust. But the state supreme court concluded that the inference of contradiction between the 1961 and
1963 trusts formed an insufficient basis on which to question Seward Sr.’s intent, which was unambiguously stated in the 1961 trust. Finally, the court had to consider the dispute in the framework of fundamental fairness (a big deal in family money cases). On these matters, it wrote: Although the social opprobrium once associated with being a child born out of
wedlock has dissipated, the presumption in favor of legitimacy remains strong. Courts continue to rely on that presumption to promote our “oft-expressed policy of supporting the integrity of the family unit and protecting the best interests of the child... child’s right to family identification.” Similarly, the doctrine furthers the public policy of favoring the establishment of legal parenthood with all of its accompanying responsibilities.

By design, the presumption of paternity in the New Jersey Parentage Act was intended to prevent “rumor, innuendo and whispers of illegitimacy from creeping into the serious process of determining paternity.”

In essence, the Ryans’ claim required the court to balance the re-examination of Cookie’s legitimacy against their right to question that legitimacy and thereby increase their economic gain. With what sounds like some contempt, the court wrote: ...the purported economic right to become eligible for an unspecified share of trust proceeds occupies a lower place in the hierarchy of rights as compared to a putative father’s right to the parent-child relationship. ... cannot be Seward Jr.’s daughter for only some purposes. By operation of law, the adjudication of Seward Jr.’s paternity cements status as an eligible beneficiary under the 1961 trust absent clear language to the contrary within the trust itself. Cookie’s lawyers said that the ruling made a strong statement about the integrity of family. “Once a husband and a wife acknowledge the parentage of a child or it is determined in court, other people cannot intrude and raise questions about a paternity,” said attorney Robert Del Tufo.

As we mentioned before, this case was only one of many involving the Johnson family. Seward Sr. had made some problems himself, in terms of family integrity, by marrying a Polish-born woman half his age who’d worked as a cook and maid on his $30 million Princeton estate. Thirty-nine days before his death, Seward Sr. amended his will, leaving
most of his estate to his new wife. His children, including Seward Jr., contested this will. That trial started the tabloid interest in the family’s affairs. The Polish wife considered Seward Sr.’s children as greedy wastrels who squandered millions in inheritance. Stories of drug abuse, incest and suicide attempts filtered out from depositions and testimony. The heirs called family servants to testify supported by taped recordings of the Polish wife’s tirades. In her heavily-accented English, she sounded like a cartoonish caricature of a wicked stepmother (even though she was younger than most of Seward
Sr.’s children). When all was said and done, the case was settled one day before it was considered by the jury. Seward’s new wife walked away with $350 million; the children split more than $40 million.

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Reaching Across Generations

Family money is like a time warp. It doesn’t matter where you are in your own life’s course you need to do all you can to contribute to the overall family account. If you contribute effectively when you’re in your 30s, you’ll be able to withdraw more for yourself when you’re in your 70s without reducing the balance left for your grandkids. If you help your dad manage his money when he’s getting too old to do it well for himself, you’re making money available for your kids’ graduate school tuition.

Reaching across generations can be a kind of immortality. Of course, some people twist that reach into a bad thing. In February 2001, the Supreme Court of New Jersey issued its decision in The John Seward Johnson 1961 Charitable Trust. The case was one of the messiest family money disputes in the history of American law.The case was merely one link in a long chain of lawsuits, all involving a dispute among the offspringof J. Seward Johnson, son of the founder of the Johnson & Johnson Corporation. In this episode,the beneficiaries of one of Johnson’s several trusts challenged the legal status of one of his granddaughters. Fellow family members claimed that the girl in question wasn’t really Johnson’s granddaughter
and therefore wasn’t entitled to a share of a $350 million trust fund.Johnson’s son, Seward Jr., divorced his first wife in
1965. During the divorce proceeding, Seward Jr.acknowledged in writing that he was the father of a child named Jenia Anne Johnson who was known by her nickname “Cookie.” Specifically, Seward Jr. submitted a statement that read:To Whom It May Concern: The Undersigned, John Seward Johnson, Jr.,...hereby unequivocally acknowledges paternity of Jennie Anne Josephine Johnson...born of Barbara E. Johnson at Princeton, New Jersey, on January 11, 1961. Later, Seward Jr. claimed that he had agreed to acknowledge the daughter quickly, without paternity tests, in order to expedite the divorce. That prob

ably seemed like the easiest way to make a bad situation better. But Seward Jr. was part of one of the wealthiest families in America so any decision he made about family structure was going to impact hundreds of millions of dollars of family money. There wouldn’t be any easy out. On December 20, 1961, Seward Sr. created an irrevocable charitable trust (the 1961 trust), naming four of his six children and 11 grandchildren as the trust’s measuring lives. Cookie was named as one of those grandchildren.

In a trust, a measuring life refers to the lives of individuals named by the founder whose deaths terminate the trust.

With hundreds of millions in family money to manage, Seward Sr. had decided to use a series of charitable trusts as the means of moving the money to his children and grandchildren. Under the tax laws in place at the time, this was the best way to minimize the amount his family would have to pay the government. The 1961 trust was funded with 4,600 shares of Johnson & Johnson common stock. Its terms directed the trustees to pay all net trust income to “educational, religious or charitable organizations” until January 10, 1997, or the deaths of Seward Sr.’s four named children and 11 named grandchildren whichever came first. After that, the trustees, in their “absolute and uncontroled discretion,”

would distribute the trust’s proceeds to Seward Sr.’s four children Seward Jr., Mary Lea Johnson Ryan, Elaine Johnson Wold and Diana Melville Johnson Stokes and “their spouses, and their issue, or any one or more of them.” After Seward Jr. began divorce proceedings against Barbara but before the court entered the final divorce decree Seward Sr. created another charitable trust on December 31, 1963 (the 1963 trust). The language of the 1963 trust generally tracked the
language of the 1961 trust, except that the 1963 trust expressly excluded Cookie. The more time that passed from Seward Jr.’s divorce, the less committed he seemed to treating Cookie as his daughter. At one point, he described
her and her younger brother as “children of other men.” But he never went as far as legally disavowing Cookie, either. He seemed content to let her status hang in murky uncertainty. But this murkiness couldn’t continue forever. In the
mid-1990s, as the 1961 trust’s expiration date approached, the trustees sought instruction from the New Jersey court on several subjects, including:
• the interpretation of the term “issue” and who comprised that group; and
• whether the trustees’ understanding of the class of beneficiaries was correct.

Thirty-five years had passed. The “children” described in the 1961 trust were elderly or had died.
The “grandchildren” were adults, some in middleage, with children of their own. The value of the

trust was then estimated at $350 million. Seward Jr. couldn’t keep his equivocation about Cookie’s status in limbo with this much money at stake. At an early conference on how the 1961 trust would be handled, Seward Jr., his second wife and their two children challenged Cookie’s inclusion as a member of the class of eligible beneficiaries. Cookie’s cousins, Eric Ryan and Hillary Ryan (children of Seward Jr.’s deceased sister Mary Lea) made a similar challenge. Despite the challenge, the trial court held that Cookie’s status as a child of Seward Jr. had been conclusively and legally established in 1965. The
court further determined that she was an eligible beneficiary under the 1961 trust. The Ryans and Seward Jr. appealed. The appeals court ruled that Seward Jr. was barred from contesting Cookie’s legitimacy. In effect, the court told him that he couldn’t renege on the legal acknowledgment he’d made in the 1960s. But the question remained open about whether the Ryans the cousins, who had never acknowledged Cookie’s legitimacy could question it now. The New Jersey Supreme Court agreed to make a ruling on this point.

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How much will you need?

Most discussions about retirement planning focus on how much you will need to accumulate in order to live in comfort. Make the maximum contribution to your 401(k) or other tax-advantaged account. Invest wisely. Don’t borrow too heavily. These are all good points to remember...and they’ll help any person in any situation avoid mistakes.

For the purposes of this book, though, we are going to suggest you plan for retirement in another way as if it’s a liability against (either real or potential) family wealth.

Don’t turn away. This doesn’t mean you’re going to have to live your last years as a hermit in a trailer without electricity or running water. It just means you need to think beyond your retirement to the ring or two outside of your circle. Of course, your retirement resources like any money are subject to some economic forces beyond your control. Prime among these: Inflation,which can wipe out thousands of retirement dollars every year.

A drop of even a few tenths of a percentage point in the inflation rate can mean another year-plus of solvency; conversely, a rise of a few tenths of a point can rob years from your reserves.

This is a well-known reality for families with money: Inflation impacts people living on investments more directly than people living on earned income (which reflects moves in the cost of living more immediately). Sure, you can invest your money more aggressively but aggressive investment means risk. Just ask all those people who were certain that
eToys, Pets.com and JDS Uniphase were going to buy them compounds in Kennebunkport or Newport
Beach. Invested money usually earns slow, steady returns. The steady part is great and has the advantage of compounding growth; but the slow part can get hammered by a slip of the Federal Reserve’s hand. One reliable average of investment returns (for everything from savings accounts to hedge funds) in the U.S. between 1940 and 2000 was 10.3 percent a year. That’s pretty good. It means that an average person could pull $30,900 a year out of $300,000 in invested retirement money. That’s almost enough for a couple to live on from the mid-range sale price of a house in a mid-range metropolitan area.

Inflation eats directly into the value of investment return, though. How much inflation should an aver age couple expect? One survey of economists published in 2001 expected the low inflation of the 1990s to continue through the 2000s at about 2.7 percent per year.


Net 2.7 percent out of the average 10.3 investment return and you’re bringing home an inflation-adjusted
$22,800 out of $300,000 in investment principal. That’s a 26 percent chop off of gross investment
income. If the average couple is going to keep its principal for heirs, it’s going to have cut one out of every four dollars from its budget. Welcome to life at the financial margins. And things get worse if hard economic times mean higher inflation. During the recession of the early 1980s, the U.S. saw steady inflation of more than 10 percent. What happens if inflation hits 12 percent? Then, on an inflation-adjusted basis, the average person losing $5,100 on his investments
has to dig into principal to pay bills.1 That has bad effects for years to come, even when times get better.
This is part of the reason why people with a lot of invested money even though they are rich and should feel secure act so conservatively about money. It’s a natural instinct in preserving principal and the earning power of the principal.

So, even though the number of North Americans with at least $1 million in investable assets grew 2.4 percent to 2.54 million in 2000, almost half of the Americans asked think that $1 million is not enough to retire comfortably.

More than half of people between the ages of 50 and 53 surveyed by the Amercian Association for Retired Persons (AARP) expect an inheritance of some sort to help smooth their retirement. This means that many Americans—already near retirement age are positioning themselves as net consumers of family money. This is a bad sign for their children and grandchildren. Which brings us back to the center circle. You need to think in terms of making your own retirement happen without drawing more from the family system than you’ve contributed.

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Money and life Expectancy

When you start to think about family money, start by thinking about yourself as critically as you can. In the course of your life, you can be both an asset to family money (by earning and investing well) and a liability (by spending lavishly or for a long time). How much as each will you be? That depends, in part, on how long your life lasts. In the 1,400 years from the fall of the Roman Empire to 19th Century America, the lifespan of an average person living in the most developed society
increased just nine years from 38 to 47. In the century since 1900, it has increased almost four times as fast to nearly 80. University researchers and other longevity experts predict that life expectancy could expand as far as 110 or even 125 years in the coming century.

This trend has had and will continue to have a major impact on everything from the size and shape of families to the best strategies for individual investment plans.

Life expectancy charts used by insurance actuaries usually follow a complex pattern of calculating the years a person has left, based on the age he or she has reached or when he or she was born. For instance, a 40-year-old male can usually expect to live until he’s 76; a 40-year-old female, until she’s 81. Some researchers say that 50 percent of baby girls born in 2000 will reach age 100. Current projections are based on relatively straightforward models with known variables. They don’t take into account potential breakthroughs in the biology of aging. More importantly, they have no bearing on how an individual lives how many packs of cigarettes a day you smoke, how many banks you rob, how many quarts of bourbon you drink, etc. Nevertheless, governments and insurance companies who bet on long-term trends want to know how long people can be expected to live. So, demographers continue to develop more intricate computer models. If you assume mortality rates will not decline, by 2050 there will be 9.9 million Americans 85 and older the current low estimate of the Census Bureau. But, if you assume that the impressive 18 percent decline in the death rate seen in the 1970s and 1980s will continue, there could be 27.3 million people over 85 years old in the U.S. by 2050. That’s the Census Bureau’s high estimate and a potential nightmare for Social Security and Medicare. Nightmares for Social Security mean problems
for most family finances.

When Social Security was initiated in 1935, life expectancy at birth was about 61 years, and there were 40 workers to support each retiree. Today, according to federal figures, life expectancy is 76.9 years and there are three workers per retiree.

The system is financed by payroll taxes 6.2 percent of each worker’s paycheck goes to Social Security and another 1.45 percent to Medicare, for a total of 7.65 percent. Employers also kick in 7.65 percent per worker. So far, it has worked. But, with life expectancy rising and Baby Boomers poised to start retiring en masse around 2011, the system is headed for trouble.

To forestall insolvency of the Social Security system (which includes the Old Age Survivors and Disability Insurance fund and the Medicare health insurance system), Congress has taken various steps. Most of them mean more work and fewer benefits for younger workers. For example: The federal government is pressing up the age at which a person
may retire with full benefits to 67 from 65. In a society that finds a growing number of older people using a shrinking supply of financial and health care assets, everyone has to make some decisions about where they will allocate their personal assets. The society as a whole also has to make these decisions.

One effect has already been felt: People are working longer. The median age of the work force in the United States increased 15 percent between 1980 and 2000. And the average retirement age could increase several months per year over the next few decades as Baby Boomers gray, but stay in the work force. And this will remain the trend for a long time; a full 80 percent of Baby Boomers expect to work in retirement.

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Control and Influence

To start this Site, we’ll consider the fundamental questions of what constitutes family and how that influences the money decisions.

Leaving abstract existential musings to French philosopher and 20th Century author Albert Camus, we agree with the psychologists who argue that life is best thought of as a series of concentric circles. You are the center circle; immediate family the people closest to you make up the ring immediately outside of you. Extended family and close friends are the next ring. Casual friends and respected acquaintances are next. The Interior Minister of Turkmenistan is on a ring somewhere farther out.

The concentric circles reflect the intensity of your personal connection physical, emotional, financial. They also reflect your influence and control.


Most of us can control our own decisions and actions as long as there’s enough Prozac around. Strictly speaking, control ends there. Most of us can influence our immediate families, no matter how dysfunctional things may seem. We may have some slight influence on friends and acquaintances. As for the Interior Minister of Turkmenistan...well, central Asia is a long way away.

What does this model of control and influence do? First, it should help you think more clearly about who fits where in the priorities of your life. This may not be a big deal if your life is devoted to a spouse and a few kids. But it’s more important if you’ve had several spouses and more kids...if your significant other isn’t legally your spouse...or if you’ve raised grandchildren, nephews, nieces or other family members in your own household. Second, it should be a reminder that your ability to control diminishes sharply as you move out from the center. Most of the problems with family money come when people try to use their resources to control the rings. By the time you’re finished with this book, you’ll have a very good idea of how bad this can make things. But you’ll also have a pretty good idea of how to avoid that trouble.

The circles should remind you of who means most to you. Sometimes people forget. For example: In 1997, a Kentucky woman started several years of legal squabbles for her family by dying and leaving all of her money to the actor Charles Bronson. Audrey Joan Knauer had never met the man whose Hollywood career reached its peak in a series of low budget action movies during the 1970s (Death Wish was the most famous of them). But she loved his work. At first, Knauer’s relatives weren’t too concerned about her will’s odd twist. They thought “all of her money” meant a few thousand dollars. Because she hadn’t worked in the last decade or so, her family had assumed she was practically broke.

As it turned out, though, Knauer who had earned a Ph.D. and worked as a chemist in the 1970s and 1980s had numerous certificates of deposit and several bank accounts. In the weeks after she died, it became clear that she had more money than anyone thought nearly $300,000, after taxes and legal fees had been paid. Bronson had already received more than half of Knauer’s money by the time her family figured out what was going on. In her handwritten will, dated April 1996, Knauer who was 55 at the time left all her financial assets to Bronson, whom she described as a “talented character actor.” The will stated that, if Bronson didn’t want the money, it would go to the Louisville Free Public Library.

In the will, which had been written on a list of emergency telephone numbers, Knauer seemed discontented with at least one relative. She wrote that “under no circumstances is my mother, Helen, to inherit anything from me blood, body parts, financial assets.” This may sound extreme; but it was a pretty effective legal document. Knauer’s sister, Nancy Koeper, filed a lawsuit contesting the will in late 1998. The lawsuit made a common claim: that the money shouldn’t go to Bronson or the library because the will had been written when Knauer was “not of sound mind...nor mentally capable of making” reasonable decisions. So, the will went into probate the time-consuming process of legal review. Knauer’s sister wanted
the entire will declared illegal and the $300,000 distributed to the family. The Louisville Free Library wanted the will to be honored but modified to limit Bronson’s claims.

The case was ultimately settled out of court. Bronson agreed to pay Knauer’s sister an undisclosed sum...but only part of the total he received. The library, which turned down an early settlement offer from Bronson, ended up getting nothing.

Maybe Charles Bronson meant so much to Audrey Joan Knauer that he really belonged in her inner circle. Or maybe Knauer’s family meant so little to her that they were way out in the ring with the guy from Turkmenistan. But, if Knauer had thought more clearly about who meant what to her...even if she loathed her family, she probably would have given the library the first crack at the money. But not thinking clearly didn’t mean she was crazy.

It’s hard to say what constitutes “sound mind”as we’ll see in more detail throughout this book. And, for many people, it gets even harder when death approaches. That’s why it’s important to think about the concentric circles when you’re relatively youngand relatively healthy.

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Who is family? and What does that mean?

This Site is about accumulating and protecting intergenerational wealth. Family money. The means of comfort, education and freedom not just for yourself, but for numerous people who’ll come after you.

You may think only rich people the Kennedys and the Rockefellers need to think about family money. That’s not so. Middle-class people can and sometimes do leave enough money to children and grandchildren to make their lives better. The trick is to start thinking strategically early.

In North America, at the beginning of the 21st Century, we live in a consumer culture that argues against building family money. Media and marketers encourage you to spend what money you have and some that you don’t. The government conspires with this effort in two ways. First, it promises to take care of you in your old age if you’re broke when you get there; second, it discourages family wealth by taxing any money you have left to leave others when you die. There are ways to get around these problems. And, despite Hollywood’s versions, most lawyers and accountants deal at least in some capacity with this getting around.

One big reason lawyers are often obscure about what they do for a living isn’t that they’re afraid of lawyer jokes; it’s that they don’t want to spend a whole cocktail party answering arcane questions about wills and probate court. This book will deal with that hard stuff: technical matters about wills, living trusts, tax issues and powers of attorney.

But, before we get into the details of whether you’re better off putting shares of the family business into a generation-skipping or charitable remainder trust, you need to ask yourself some more basic questions. These questions will get to the core of what constitutes your family by blood, law or spirit. If it works right, this process leads you to an understanding of yourself and the people closest to you. And this understanding helps you make the appropriate decisions for handling the financial assets you accumulate by inheritance, luck or hard work. Of course, there are complexities in every family. Some families bring their own problems members who make bad decisions, members who don’t get along. Other families have external problems weak or non-existent standing under the law...outright conflicts with social convention. And, more complex still, the size and shape of families change over time. Children are born, people die, relationships break apart. So, any definition of “family” has to be a multivariable proposition.

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